RBA’s Slow Pace and Inflation Concerns
The Reserve Bank of Australia (RBA) has been facing increasing pressure to bring forward its plans for rate relief after the U.S. Federal Reserve announced a half a percentage point interest rate cut on September 18. While this move has been a relief for financial and commodity markets, it has raised concerns about the RBA’s slow pace in addressing inflation.
According to Peter Tulip, chief economist at the Centre for Independent Studies, the RBA’s gradual approach has left inflation high compared to other central banks. He points out that most central banks, including the Fed, raised rates more aggressively, resulting in a quicker decline in inflation. The Fed, for instance, raised rates up to five and a half percent, while the Australian cash rate was gradually raised from 0.1 percent in 2022 to 4.35 percent, where it has remained since November 2023.
Tulip suggests that the RBA should reconsider its gradualism approach and learn from the success of the Fed’s strategy. He believes that the RBA’s slow response has contributed to inflation remaining well above target. By taking a more proactive approach, the RBA could potentially bring inflation under control more effectively.
RBA Governor Michelle Bullock, however, has maintained that it is premature to consider rate cuts despite the drop in inflation. In her address on September 5, she emphasized the need for policy to remain sufficiently restrictive until the RBA is confident that inflation is moving sustainably towards the target range. This cautious approach suggests that the RBA may be hesitant to deviate from its current strategy.
The Impact of the U.S. Federal Reserve’s Decision
While the U.S. Federal Reserve’s decision to cut interest rates may not have an immediate impact on the Australian market, Tulip suggests that it could have longer-term implications for Australian monetary policy. He points out that the Australian yield curve has not changed significantly, indicating that the effects may take a few months to materialize.
The Fed’s decision to cut rates is not surprising given the incoming data for the United States. Core inflation has fallen, and the unemployment rate has risen, prompting the Fed’s response. Federal Reserve Chairman Jerome Powell stated that the bank’s recalibration of interest rate settings is aimed at ensuring strength across the economy and the job market.
The RBA now faces the challenge of balancing the need to address inflation concerns with the potential impact of global economic developments. As central banks around the world continue to trim their interest rates, the RBA may need to reassess its approach to maintain stability and support economic growth. The Fed’s successful strategy serves as a reminder that a more proactive stance may be necessary to achieve the desired outcomes.