The markets are now pricing in a very low chance of a rate cut next week. (Source: AAP/Getty)
The governor of the Reserve Bank of Australia has dramatically dampened expectations of another rate cut for borrowers next week. Markets were predicting a cut as more than likely at the bank’s November meeting but comments from Michele Bullock overnight quickly put an end to that.
Speaking at a Australian Business Economists event in Sydney on Monday night, Bullock appeared sanguine about the recent surprise spike in unemployment, and didn’t shut down a suggestion that a key metric known as the NAIRU – the Non-Accelerating Inflation Rate of Unemployment – is perhaps higher than the bank thought.
Former RBA economist and now Chief Economist at the Centre for Independent Studies, Peter Tulip, told Yahoo Finance on Tuesday the metric “is one of the most important numbers in the setting of monetary policy”.
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Despite unemployment recently rising more than the RBA forecast, the governor reiterated the bank’s view that the labour market remains “a little tight”.
Those three little words could mean borrowers won’t be getting rate relief this year.
“There are still jobs being created, just not as many,” Bullock said.
“We’d always thought [unemployment] would drift up a bit. Maybe it’s drifted up a bit further than we thought, but it’s not a huge amount yet.”
Westpac senior economist Pat Bustamante noted this morning that Bullock did not dismiss the suggestion that the NAIRU was higher than previously thought.
In the banks own words, the NAIRU is the lowest unemployment rate that can be sustained without causing wages growth and inflation to rise.
“When pushed about the possibility of a higher NAIRU, she didn’t seem overly concerned,” he wrote.
“The market is now pricing in a 15 per cent chance of a rate cut in November – down from around 60 per cent on Friday,” he added.
Speaking to Yahoo Finance, Tulip called for more transparency from the bank about how it looks at and calculates the expected NAIRU.
“I think the RBA should be releasing more details of its estimates of the NAIRU. This is one of the most important numbers in the setting of monetary policy,” he said.
“I think they would answer that these things are uncertain and difficult to estimate, and that’s true, but they should be telling us what they do know and what they are thinking.”
The Australian Bureau of Statistics will release the latest Consumer Price Index (CPI) reading on Wednesday.
The consensus among economists is that Australia will see a 1.1 per cent quarterly rise, which would bring the annual rate up from 2.1 per cent in June to 3 per cent in September.
Core inflation is projected to climb by 0.8 per cent for the quarter, pushing the annual core rate from 2.6 per cent to 2.8 per cent, however some forecasters are expecting a surprise to the upside.
If, however, inflation comes in cooler than expected, the RBA might seek to keep more people in the workforce and deliver a rate cut next week.
Some banks have already cut interest rate offers this month to attract new mortgage customers, with Aussies urged to take notice and make the switch for a potential “double” cut if the RBA was to reduce the cash rate before Christmas.
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