After a summer break, the Reserve Bank of Australia is set to hold its first meeting of the year next week, with interest rates high on the agenda. A decision is expected on Tuesday afternoon, with most economists predicting a rate cut. says she’s cautiously optimistic that the Reserve will move to ease rates.
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00:00The markets out there are rating it at around a 90% chance. So, they really have priced
00:07it in. It's almost a dead-set certainty. But I think what we know from the Reserve Bank
00:12is it's a relatively cautious central bank. So, I would put it closer probably to a 50-50
00:18call. I think there's a good chance they can move. They certainly have the rationale, if
00:23you like, or the data to support a rate cut in the form of a very slow-moving economy.
00:29We saw that in the latest national accounts that came out late last year. And we've seen
00:33inflation, of course, which has been great news, come right back down towards the RBA's
00:39central target of 2% to 3%. So, that headline figure is well within the band, and that core
00:46figure is well on the way at 3.2%. So, look, it could definitely move on Tuesday. But in
00:53terms of what we've seen in the past and the history of the Reserve Bank, it does tend
00:58to hold its fire, both in terms of when it moves and when it starts to cut.
01:02Well, the Reserve has been consistent, talking about unemployment rates as being significant
01:09to any decision to cut interest rates. The next employment data is actually coming out
01:13after the Reserve meets this week. Could they be forgiven for being gun-shy about changing
01:20rates?
01:21Yeah, indeed. So, one of the things the Reserve Bank, and which has been holding it back,
01:25because I think you could argue, indeed, and I would argue that there has been the data
01:29there for the Reserve Bank to start cutting, certainly late last year, in terms of starting
01:33to cut interest rates. There are signs that the economy really is struggling, the private
01:37sector in particular, and there are those signs that inflation has come right back down.
01:43What's been holding it back is a couple of things, and that unemployment figure is one
01:47of the big ones. And that really comes down to, is unemployment at a rate that's consistent
01:52with inflation staying within that 2% to 3% band. Now, there are various views on this
01:58amongst economists. There are some that think unemployment needs to be higher before the
02:02Reserve Bank can really start cutting rates with any confidence at around 4.5%, and that's
02:07where the Reserve Bank has been. There are other economists out there that think, actually,
02:11you could have unemployment down at around 3.5% without causing major issues for inflation.
02:16It is really going to come down to that, I think, in terms of, is the Reserve Bank prepared
02:21to walk away from where it has said that that rate of unemployment needs to be, at
02:25around 4.5%, and I guess can see that perhaps it's got that wrong, and perhaps unemployment
02:32indeed can be lower, and that can be consistent with getting inflation back under control.
02:38That is really the central question, I think, today, and we haven't really seen any indication
02:42from the Reserve Bank that they've changed their position on that unemployment figure
02:46and where they think it needs to be. And that's probably the one big risk, I think, in terms
02:51of for mortgage holders on Tuesday, that the Reserve Bank will indeed decide that,
02:55no, no, we do need to see that unemployment figure higher before we move, and so we're
03:00going to hold for another month.