Big US cut might change Michele Bullock’s tune – MASHAHER

ISLAM GAMAL19 September 2024Last Update :
Big US cut might change Michele Bullock’s tune – MASHAHER


In Australia, both RBA governor Michele Bullock and her predecessor, Philip Lowe, have made clear the bank is willing to accept slightly higher inflation for more people with a pay cheque.

The Fed is unusual among central banks at present as it is cutting from a position of relative economic strength. As Powell noted, growth is “solid” at around 2 per cent and inflation has come down rapidly.

Reserve Bank governor Michele Bullock may have to change her rhetoric about the state of the economy.Credit: Louie Douvos

But other countries that took their lending rates higher than Australia, and moved earlier, haven’t had quite the same outcome as America.

New Zealand and Canada, by contrast, are in recession. The Kiwi economy has been contracting for the past 12 months, while in the great white north, the unemployment rate is now at 6.6 per cent.

The Bank of England, which meets on Thursday, has relatively low unemployment, but the economy has in effect flatlined since the start of last year.

And while the US is doing better than just about everyone, the issue around the jobs market is one reason equity markets did not rejoice at the Fed’s rate cut.

Apart from the slowdown in job creation, the proportion of Americans in a job is still lower than it was before the pandemic. A similar situation is playing out in Britain (where there has also been a spike in people reporting illness).

In Australia, there is a record proportion of people in a job, about 1.4 percentage points higher than before COVID-19. But the number of job ads is falling, suggesting it will get tougher to find work in the coming months.

All of these different factors mean the Reserve Bank has some tough decisions ahead.

Despite the tough-talking by Bullock about rates staying higher for longer, financial markets – and an increasing number of economists – are calling her bluff.

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Markets reckon the bank will use its pre-Christmas meeting to cut the cash rate. They believe it will be under 4 per cent by the federal election, which is due by May next year.

The bank board meets next week and no one believes a rate cut is on the agenda. But come Wednesday, when the volatile monthly inflation report is released, the story will probably change again.

Economists at Westpac and Commonwealth Bank expect annual inflation through August to fall to 2.7 per cent while some others reckon it could be even lower.

Bullock would face an uphill battle to argue interest rates need to stay elevated even as inflation is falling while central banks around the world are cutting rates to protect their economies from abrupt slowdowns or worse.

The Reserve Bank may have to change its tune – and soon.

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Source Agencies

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