The RBA Should Just Get on with the Job of Cutting Rates

If you’re looking for a toxic relationship between a central banker and his political master it is hard to go past Jerome Powell and Donald Trump.

Despite Trump appointing Powell during his first term as President, he is now openly hostile about the central banker’s contribution to decisions to hold interest rates at the current levels and not slash them continually to boost economic growth.

He is also busily smearing Powell about an alleged blowout in the cost of the US Fed’s new building renovations, charges which Powell has strongly denied.

All of which is par for the course when you have a property mogul President who never saw an interest rate cut he didn’t like and a central banker in Powell who is watching the ominous signs that Trump’s tariff blitz could boost inflation to uncomfortably high levels.

Interestingly, our own Reserve Bank has also been struggling to contain the budget on renovating its Sydney offices, which – like the US Fed’s – are full of asbestos and historic features.

Signs of Conflict Emerging in Australia?

Here in Australia the relationship between our independent central banker Michele Bullock and Prime Minister Albanese seems a lot more positive, despite Albanese’s veiled dig at Bullock during the proactivity summit when he criticised economists who “thought that you couldn’t get inflation down without getting unemployment up.”

This perhaps points to the emergence of a similar but more muted Australian conflict between the independent central bank and the political executive.

That is because despite the latest delayed interest rate cut to 3.6%, the Reserve Bank is arguably behind the curve in cutting interest rates in Australia and they’re still very much in a restrictive zone despite inflation being well controlled for a considerable time.

Tariffs Won’t Be Boosting Our Inflation Rate

And unlike the US, our Reserve Bank doesn’t have to worry about domestic tariff policies pumping up inflation.

Arguably by leaving rates on hold in July, the RBA is now at least one 25 basis point cut behind where it should be, given it would probably have cut again in August anyway, particularly with economic gross sluggish and unemployment up.

That means that the RBA is still applying a restrictive cash rate which is acting to slow the economy rather than being mildly stimulatory as is arguably needed at the moment.

Should Rates Be in the Stimulatory Zone?

Where the “neutral” rate stands is always a matter of great debate among economists, but is thought to be around the 3% mark in Australia, so with headline inflation at the bottom of the target band at 2.1%, we should arguably be at least at that neutral rate by now or approaching it rather than still being at 3.6%.

The underlying rate of inflation has been heading steadily down too, so the trend for inflation is not only at the bottom of the target zone but potentially heading lower which, when combined with a soggy jobs market, supports rates being not just neutral but rather should be heading into the stimulatory zone.

The only argument the RBA would have against continuing to cut rates is that the jobs market is still too strong and any stimulus will be reflected in much higher wages.

This seems like an increasingly unlikely outcome as the job market seems to be softening and unemployment is rising a little.

Australia is unlikely to have the sort of outright war that has been going on between Donald Trump and Jerome Powell but arguably Anthony Albanese has a right to be a little churlish about the pace of cuts here in Australia.