RBA interest rate cuts are needed

Continued high interest rates slow growth; Even the RBA admits the current cash rate is tight. Stephen Koukoulas reports.

RBA MONEY Policy Board It will meet on November 3 and 4, where updated forecasts for economic growth, inflation and the labor market will be discussed. These will be published in the Monetary Policy Statement that will accompany the interest rate decision.

Simply put, if these forecasts and assessments of the risks surrounding these forecasts are reasonable, there will be a fourth interest rate cut in the current cycle and a fifth will be included in the outlook.

There are many reasons of varying importance behind the interest rate cut scenario that MPB will consider.

The most important thing right now is unemployment ratio. This rate was 4.5 in September, up a total of 1.1 points from the low point of 2022 and 4% at the end of 2024.

It has been clear for some time that the private sector is not growing fast enough to generate the level of job creation that would keep the labor market close to full employment with the rate of inflation within the RBA’s mandate.

The data is clear; The labor market is deteriorating.

Job openings and postings are 30% to 35% below their peak levels. Request workers visibly dropped.

Wage growth is the most reliable indicator of whether the economy is creating sufficient employment and operating at or near full employment. slowed down It has risen from a peak of 4.3% last year to the current 3.4%.

If SEEK salary data Wage growth, which is a good guide as it usually is, is expected to ease for the rest of 2025 and hover around 3 to 3.25%.

This pace is consistent with inflation falling below the mid-point of the RBA’s 2-3% target band.

The reason for this suboptimal growth rate is continued high interest rates. This is evident in the RBA’s forecast for excess increases to peak at 4.35% in 2023 and then be slow to reduce them in 2024 and 2025 as inflation returns to target and the labor market begins to weaken.

This being the case, even the RBA is losing its current official cash amount of 3.6%. ratio It is “tight”.

In other words, it is at a level that will negatively affect economic growth and employment increase. It has been three years since the cash rate set by the RBA was above 3 per cent; this ratio is generally considered neutral; low enough to stimulate private sector spending and investment, but high enough to stem the rampant economic activity that has seen inflation rise at a disturbing pace.

RBA’s other plan negotiations It will be the September quarter consumer price index, which is scheduled to be published on October 29. While there is always the risk of a data “shock”, in the current situation the RBA is likely to be relieved by the fact that inflation remains on target.

Indeed, an annual adjusted average inflation rate of 2.7% or 2.8% will have some residual impact from the removal of retail electricity subsidies and increases in excise taxes on tobacco, oil and alcohol. In other words, it is above the midpoint of its target range due to persistent price pressures resulting from government policies.

The RBA knows this and is likely to explain why it sees underlying inflation pressures remaining in check, particularly due to softer labor market conditions and a less-than-strong expansion in the private sector.

In other words, the updated inflation forecasts were set at 2.5 percent for 2026 and 2027, and a cash rate of 3.1 percent was also included in these forecasts.

The interest rate cut is likely to help support confidence, household and business cash flows and reduce the barrier to new investment. These are the key issues that drive labor market power or otherwise.

Further interest rate cuts are also likely to positively impact business confidence and consumer sentiment, which have not been very robust in the rate-cut cycle so far and have consequently been an obstacle to a full and sustainable economic recovery.

Another nice thing about interest rate changes that help manage the ups and downs of the business cycle is that they are easy to implement – it’s just an announcement from the RBA – and can be added to or reversed as new news about the economy comes in.

Lower interest rates are needed for now. It’s that simple.

Stephen Koukoulas is one of Australia’s most respected economists, the former chief economist of Citibank and senior economic advisor to the Australian Prime Minister. You can follow Stephen on Twitter/X @TheKouk.

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