Happily, the Reserve Bank can and will quietly bin the International Monetary Fund’s instruction that interest rates in Australia need to go up some more. They don’t.
But nor will rates need to be cut, as the markets and most economists are predicting will start happening later this year, with more cuts next year.
The trouble with economists and financial market traders is that they need constant change – it’s hard to make money in the markets (or to sound interesting and attract attention) when nothing is happening.
But sometimes interest rates just need to stay where they are for a while, like they did when Bernie Fraser and Ian Macfarlane left the cash rate at 7.5 per cent for 18 months in 1995-’96, or when Macfarlane had just one cut in two years between August 1997 and October 1999, or when Philip Lowe left it at 1.5 per cent for nearly all of his first three years on the job, from August 2016 to May 2019.
And throughout those periods, traders bet and economists predicted that interest rates would move, up and down, because that’s their job.
Michele Bullock led a rate hike at her second meeting as governor last November, and notwithstanding the conflicting clamours from the IMF and the markets, that should be it until 2025.
Obviously events might get in the way, such as an unexpected and unlikely recession – global or just Australia – which might force rate cuts, or a failure by the nation’s companies to keep laying people off as they did in December, to force the opposite. Employment fell 65,100 then, but unemployment stayed at 3.9 per cent because 65,900 people dropped out of the labour force for some reason.
The RBA would prefer unemployment to be 4.5 per cent, not less than 4 per cent as it is now, and that requires another 100,000 or so souls to lose their jobs, assuming no change in labour force participation.
Can that be achieved without the recession that markets seem to be predicting?
Well, on one definition, at least, that is a recession. The Sahm Rule, devised by US economist Claudia Sahm, says a recession happens when the unemployment rate increases by 0.5 percentage points or more from its low during the previous 12 months.
On that definition we’ve already had a recession: The unemployment rate rose from 3.4 to 3.9 per cent between November 2022 and November 2023. If the RBA succeeds in getting it up to 4.5 per cent in the next 12 months, as required, that would by back-to-back Sahm recessions.
But thankfully for the national blood pressure, we define a recession as two consecutive quarters of falling GDP and ignore the rest. And with population growth galloping along at more than 2 per cent and exports rising by 15.8 per cent in the latest financial year, a GDP decline is virtually impossible.
With no “Recession!” headlines and no TV interviews with sadly sacked case studies, the RBA will feel under no pressure to cut interest rates until the inflation rate is well below 3 per cent, and that’s not likely to happen until late 2025 at the earliest.
What about more rate hikes, as the IMF wants?
Actually, while the IMF did say in its report on Australia last week that “monetary policy should be tightened further to ensure inflation comes back to target earlier than 2026 projected in the baseline”, that was later hedged to some extent.
It went on to say: “Rising interest rates have more than doubled household interest payments as a share of disposable income (from 5.2 percent in 2021 to around 11 percent at the end of 2022), projected to reach 13 percent by the end of 2023. This, coupled with high household debt, and the decline in real wages point to relatively strong transmission (of monetary policy)”.
To put that more simply, the IMF acknowledges that higher interest rates have hit a lot Australians hard – “around 40 per cent of households”, it says.
There was also a couple of oblique swipes at the high level of immigration in the IMF report, first because of the upward pressure on rents and second because the efforts of states to deal with the resulting infrastructure deficit have a high “multiplier effect on the economy, especially in the face of supply and labor market shortages”.
This absence of “adequate fiscal-monetary coordination” could lead to higher inflation, warns the IMF.
Which is the IMF’s polite way of saying that Australia’s economic policies are a contradictory mess.
The Reserve Bank is trying to bring inflation down by doubling interest payments as a share of income, lowering demand and putting people out of work. Meanwhile, the government has cranked up immigration to historic levels, increasing demand and rents and putting pressure on the states to build more roads and bridges, soaking up the available labour.
So the IMF wants both rate hikes and government spending cuts.
Neither will happen, especially after Prime Minister Anthony Albanese called Labor MPs to Canberra on the weekend for an urgent meeting to discuss measures to deal with cost-of-living pressures — including a $3 billion “energy package” to reduce power bills.
Alan Kohler writes twice a week for The New Daily. He is finance presenter on the ABC News and also writes for Intelligent Investor.
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