RBA rates decision – and we’ve entered the longest recession in history

Posted by Gavin Chau

Yes, it’s that time of the month again. I’m not sure if you guys are as sick of reading about this as I am of writing about it, but I’m as disappointed as anyone that we still haven’t seen a rate cut this year.

The RBA seems to be the only central bank in the world that wants to look at the trimmed-mean CPI figure rather than the actual CPI, just like the government wants to focus on the GDP figure rather than the GDP per capita. It’s a sneaky way to look at the figures that don’t hold up to a basic logic test, but at a guess, I think Michelle Bullock prefers to err on the side of caution.

Let’s recap the economic situation over the last 12 months.

GDP growth has fallen from 2.1% to 0.8%
Unemployment has risen from 3.8% to 4.1%
CPI has fallen from 4.9% to 2.1%
Wage growth has fallen from 4% to 3.5%

To top it off, we have also entered the longest recession in history. If we look at the GDP per capita figures (economic activity per human in Australia), we have been losing money for seven consecutive quarters. The good news is that the trend seems to be reversing, and there are some economic green shoots. This has nothing to do with the economy’s engine firing up and everything to do with sentiment.

The market (which is you and I) is now beginning to price in anticipation of an interest rate cut, and people are spending a little more in anticipation of it. It simply no longer believes what the RBA is saying. Part of it is also likely due to a rise in asset prices. This is called the wealth effect. When asset prices rise, we tend to spend more even though our take-home pay hasn’t increased and costs haven’t dropped. Like asset markets, the economy is driven by emotions as much as any other factor. If we feel rich, we spend money. This is all good; we’re likely past the worst of things now.

Employment growth is turning around, with AMP’s leading indicator pointing to better conditions. Virtually all of this growth has been from the public sector, with the private sector still languishing behind.

If we look at the money markets, they imply we will see three rate cuts next year (a downgrade from the four rate cuts predicted earlier this year). Much of this has been due to fiscal policy. The government has been actively trying to keep the economy afloat rather than relying on the RBA. It is good to see they’re trying to do their job.

CBA has a similar forecast, but like most of the private sector looking at real-life businesses, they believe that inflation is falling faster than the RBA predicts.

The Q4 CPI reading, which we will see on the 29th of January, will likely be the most important figure to watch. With no RBA meetings in January, the next chance of a rate cut will be in February 2025. This is healthy in the long run. The longer the rate cut is delayed, the higher asset prices can go, and we’re in the early stages of an upswing in global liquidity. More liquidity, higher prices… there’s no better single indicator.