Home borrowers relentlessly circling the real estate market in search of a doorway into their first home are feeling disheartened after expectations of another rate cut have been all but abandoned.
Speaking in a fireside chat at the Australian Business Economists dinner in Sydney ahead of this week’s quarter inflation figures, Reserve Bank of Australia (RBA) governor Michele Bullock hinted that rate cut predictions are unlikely to eventuate.
Joined on stage by the bank's head of economics analysis Michael Plumb, Ms Bullock told the audience that the recent spike in unemployment meant that the labour market remains ‘a little tight’, which signals upward pressures on wages.
While waiting on crucial inflation data on the economy to make a decision on rate cuts, Ms Bullock said the RBA has already received contradictory data that indicates that inflation is higher than expected, while the jobs market is lower than hoped.
Unemployment concerns
The unemployment rate is sitting at 4.5%, a little above the RBA’s forecasts of 4.3% rate anticipated by the end of this year. Meanwhile, inflation was also stronger than expected in the September quarter.
While monthly numbers can be volatile, the jump in unemployment was a surprise. It could impact the potential for a rate cut on 4 November and quickly moved the dial earlier this month on expectations for the board's decision.
“There are still jobs being created, just not as many,” Ms Bullock said.
The RBA may be forced to quickly switched its decision as various data tells different stories. Picture: Getty
“The labour market is still a little bit tight. There is still employment being created, but the supply of labour isn’t growing as quickly as it was. That means the unemployment rate might rise a bit.”
“It is difficult to get the right skilled labour. We are conscious that we are trying to keep the unemployment rate as low as we can without fuelling inflation. We think we are close, but it’s very uncertain, so we need to be prepared for different possibilities."
Ms Bullock continued: “When we look at the forward-looking indicators for the labour market, we always thought (unemployment) would drift up a bit. Maybe it has drifted up a bit further than we thought, but it’s not a huge amount out. We will have to wait for a bit more data and forecasts to come through.
Ms Bullock warned the supply of labour isn’t growing as quickly as it was. Picture: News Corp Australia
“Then we can make some decisions about whether we can make some interest rate cuts to address the employment market or whether we are more worried about the inflation rate. But let’s be positive. Inflation is back in the band, it’s not at the mid-point of the target range, and the unemployment rate is still pretty low, so we are in a pretty good position.”
Hold the course
The comments hint at a cash rate hold next, which suggest home buyers are unlikely to see a reduction in borrowing costs in the near future.
The RBA has also been analysing services inflation, which relates to healthcare costs, insurance premiums, and the expenses of building a new home. Some of these costs slowed in the June quarter, while others remained steady.
REA Group senior economist Eleanor Creagh says today's inflation data will be crucial to next week's decision. Picture: Getty
Early data indicators suggest that dwelling costs and market services appear elevated, forcing the board to remain cautious, Ms Bullock revealed.
REA Group senior economist Eleanor Creagh said governor Bullock’s message was clear.
“If core inflation lands around 0.9% for the quarter, that’s a material miss and it meaningfully lowers the odds of an immediate cut," she said. "The bank remains data dependent in driving their next move and won’t be bounced by monthly noise.
“They’ll weigh the full quarterly read, especially the trimmed mean, before easing further. As a result, the decisive information is the inflation data for the September quarter. This will determine whether we get a rate cut at the RBA meeting in early November."
Decision time
Ms Bullock also told the audience that the RBA has to be humble when forecasting.
“You do your best, but things don’t always turn out when you forecast and you have to be ready to accept that you’ve misread something and change your mind."
Fresh from a trip to the Unites States to meet with global central banks, Bullock also shared insights from her global counterparts while on stage.
While globally, inflation is coming down, she noted financial markets are sanguine about amid geopolitical tensions. Some within central banking circles also expressed concerns about deficits and government debt in their respective parts of the world.
Ms Bullock recently met with other representatives from other global central banks in the United States. Picture: Getty
Pondering whether financial markets could turn negative, Bullock said: “Some people are worried that it might all end in tears.”
Bullock, who has been in the head role at the RBA for two years, also told the audience that she has been pushing for cultural change within the RBA, introducing processes that welcome differing opinions, which Bullock said leads to better decisions.
Being able to achieve in bringing inflation back down and maintaining some of the gains in the labour market has been both a challenge and a key achievement in the role, she said.
The next RBA board meeting is scheduled for 3-4 November and will conclude with the cash rate decision.
This article first appeared on Mortgage Choice and has been republished with permission.
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