Major bank: RBA to cut in November

Yesterday, RBA Governor Bullock restated last month’s interest rate guidance in ongoing evidence to Australia’s parliament

Meanwhile, Goldman released a note in which it argues that the threshold for additional rate hikes remains high, and it anticipates the RBA starting a modest easing cycle in November.

  • Despite rising unemployment, Governor Bullock reported continued growth in the labor economy.
  • The RBA’s NAIRU estimate was a little over 20bp above the current unemployment rate of 4.1%, but there is large uncertainty around the calculation.
  • Private sector difficulties may balance fiscal stimulus in the recent Budget.
  • New energy rebates would lower headline inflation by ~50bp next year but would not significantly affect underlying trimmed-mean inflation or consumer spending due to the minor subsidies.
  • Refunds may lower inflation expectations and indexed pricing.
  • The RBA prioritizes quarterly data above monthly CPI data during inflation discussions. Governor Bullock stated that recent monthly data indicates slower inflation than anticipated, but the RBA will await quarterly statistics to further assess recent developments.
  • On the lags of monetary policy, the Governor observed that “it is possible in a general sense that there is about 50bp of policy tightening to come” given that “we generally think about the flow through of monetary policy as taking 18 months in full”.

I will add that:

  • Energy rebates will be permanent if there is no gas market reform.
  • They will be disinflationary over time.
  • Tax cuts are unlikely to be stimulatory, in part because of the lagged affects of monetary tightening.
  • Falling wages growth and immigration will curtail service inflation in due course.
  • The ramp-up in fiscal spending is largely over.
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