Will there be a February rate cut? Macro-economics says unemployment is key

ABC NEWS (Australia)

Australian households under mortgage stress could be set for some relief with a possible rate cut on the way next month. But as the ABC’s Alan Kohler explains, despite falling inflation, there is another key factor, that could be standing in the way.

Transcript

00:00This week we'll get the all-important December quarter inflation rate from the ABS, which

00:07a lot of economists and the futures market think will pave the way for a rate cut in

00:12February. But will it? Maybe not.

00:17September quarter core inflation was 3.5%, too high. The monthly number in November was

00:233.2%, which is still above the 2-3% target range. But even if the December quarter core

00:29inflation comes in below 3%, which it probably won't, I don't think that'll be enough on

00:35its own.

00:36As this graph shows, the RBA usually only cuts when unemployment rises. The only times

00:43that didn't happen is in the Asian crisis of the late 1990s, and between 2014 and 2019,

00:51when the cash rate was cut from 4.5% to 0.75%, even though unemployment fell. But that was

00:59because inflation was well below target. It averaged 1.6% for five years. So the Reserve

01:06Bank was afraid of deflation, and was trying to get inflation up. No danger of deflation

01:13this time, and unemployment is not rising, it's falling. It was 4.2% in July, and now

01:19it's 4%. In fact, the labour market is a lot stronger than the RBA expected.

01:26So don't shoot the messenger, but I think this week's inflation number, whatever it

01:29is, is unlikely on its own to bring about a rate cut next month. I think more of us

01:35need to be unemployed.

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