I wrote earlier that the RBA is weirdly obsessed with unemployment being too low. They’re worried that low unemployment will suddenly set off higher wages and more inflation.

Well, the latest Statement on Monetary Policy shows that their obsession has not gone away.

Here is some central bank speak:

“Model-based estimates also suggest that the labour market remains tighter than full employment”

Translation: Our model thinks an unemployment rate of 4.1% should set wages racing up and cause inflation.

The problem with that is unemployment has been at or below 4.1% for years and wages have not shot up. In fact, wages have weakened.

Rather than relying on their failing models the RBA should look out the window and see what is actually happening in the economy.

Jim Chalmers is finally given an opportunity to deliver his lines on the Coalition split:

This is a nuclear meltdown. And the Coalition now is nothing more than a smoking ruin. They are hopelessly divided on personalities and on policy. It shows that the new leadership has failed its first test. It shows that they’ve learned absolutely nothing from the last few weeks or indeed, the last few years. This is a nuclear meltdown in the Coalition.

And it’s hard to see how Australians can take them seriously when they don’t even take each other seriously. So the Coalition is now little more than a smoking ruin. I think that that is really clear. Also clear is the contrast between a government getting on with the job, managing the economy responsibly, here to talk with you today about the second interest rate cut in three months. And a Coalition, or a former Coalition, completely and entirely focused on themselves.

They tried to divide the Australian community in the election campaign and they ended up dividing themselves. And the consequence of that is that the Liberal Party is now barely bigger than the crossbench in the Parliament. We’ll go – you three and then back here and then we’re done.

In the RBA’s Statement on Monetary Policy, they have downgraded economic growth, downgraded inflation, and upgraded unemployment.

This means that interest rates are restricting the economy and inflation is not a concern.

Given this you might have expected a bigger cut than just 25 basis points. But the RBA says that the global economy is uncertain. This is code for they don’t have any idea what Trump is going to do.

But Trump uncertainty is only on the downside. This means that Trump messing around is not going to increase Australian inflation. So, there is no reason not to cut further.

Really the RBA should have cut in April. Having failed to do that they should have cut more than 0.25% today.

Does the government claim any influence over the RBA’s board’s decision here?

Chalmers:

I don’t see today’s decision in political terms. I see it in economic terms. It is the right decision made for the right reasons. And the right reasons to make an interest rate cut like we’re seeing today is the fact that together, as Australian, we’ve made a heap of progress on inflation. The global environment is uncertain. And for reasons outlined in the independent Reserve Bank’s statement today, they felt the conditions warranted this cut.

The other thing which is a very good development is the Governor, herself, will be out shortly and will be able to speak through the rationale and the reasons for the decision that they’ve taken today.

Politics do not play a role in decisions taken independently by the Reserve Bank. They weigh up the economic conditions as they have in this case, and they have the opportunity to talk through their reasons.

On the future of the energy rebates, Chalmers says:

What we’ve made clear over the course of recent months, certainly since the recent weeks since the budget, is that this energy bill relief is an important way that we are helping Australians with the cost of living.

We only extended it for six months rather than 12 months, because we know that at some point, this electricity bill relief will taper away and will have to end. We made that clear publicly on a number of occasions.

The point that I made on Friday, which I think is what you’re referring to, and that strange story today was referring to, is that when I was asked on Friday about cost of living help – in this case, energy bill rebates – I made the point that I make before and after every single budget we’ve handed down, which is that we evaluate the economic conditions, we evaluate the budget constraints and the pressures that people are under, and we do what we can to help. The final point that I would make about that is that I thought that it was very unusual in a story which was about energy bill rebates compared with ongoing help with energy efficiency or renewable energy, not to mention the hundreds of millions of dollars, extra dollars, that we’re investing when it comes to renewables for social housing in particular.

We announced that towards the end of last year. It’s a very substantial investment. And what it shows is that we’ve been able to find room in our budget to help people with bills at the same time as we help people grasp the opportunities of renewable energy, including when it comes to people in social housing.

Eira asks:

Now that the RBA has done the right thing on interest rates, does it give the government any room to bring Newstart and other welfare payments up? No worries about the inflationary pressures?

They already had that space – but they are out of excuses now you would think

One on inflation and one on the Coalition collapse.

On inflation, Chalmers says:

This is very welcome relief for millions of Australians. We are really pleased to see more help is on the way. And that’s what this decision today is all about. It reflects what we’ve made in the economy and recognises the uncertain global environment as well.

When it comes to inflation, both headline inn and underlying inflation are now both in the Reserve Bank’s target band for the first time in almost four years. And this is the first time since records began that we’ve got the unemployment rate in the low fours at the same time as we’ve got both measures of inflation in the target ban at the same time.

I was really pleased to see in the statement released by the Reserve Bank, the three main points that the monetary policy board has made.

First of all, inflation has fallen substantially since its peak, and the upside risks to inflation have diminished.

Secondly, it does recognise, I think, in ways that the government recognises, that global uncertainty has increaseded in recent times. It also points out, though, that the household incomes have picked up in our economy as well. And that’s a good thing, too.

Today’s interest rate cut doesn’t mean that the job is finished when it comes to the cost of living, but it will help millions of Australians with a mortgage.

And it’s worth remembering that three years ago this week, this government came to office. When we came to office, inflation and interest rates were both going up, and now, both are going down, and that’s a good thing

At its meeting today, the Board decided to lower the cash rate target by 25 basis points to 3.85 per cent. Thank frick.

Inflation continues to moderate. This has been the case for a long while now.

Inflation has fallen substantially since the peak in 2022, as higher interest rates have been working to bring aggregate demand and supply closer towards balance. The RBA loves to talk about an aggregate demand/supply imbalance – as though the total amount of spending and investment in the economy is much greater than the supply of things. And yet household consumption and retail trade is lower than pre-pandemic trend levels IN ABSOLUTE TERMS so no idea why they keep on about this.

Data on inflation for the March quarter provided further evidence that inflation continues to ease. At 2.9 per cent, annual trimmed mean inflation was below 3 per cent for the first time since 2021 and headline inflation, at 2.4 per cent, remained within the target band of 2–3 per cent. Staff forecasts released today project that while headline inflation is likely to rise over the coming year to around the top of the band as temporary factors unwind, underlying inflation is now expected to be around the midpoint of the 2–3 per cent range throughout much of the forecast period. The February Statement on Monetary Policy forecast trimmed mean inflation (the CPI with the top 15% rises and falls trimmed off) settling at 2.7%. Now it estimates it will be 2.6%

The outlook remains uncertain. As opposed to those previous times in history when the outlook was certain.

Uncertainty in the world economy has increased over the past three months and volatility in financial markets rose sharply for a time. While recent announcements on tariffs have resulted in a rebound in financial market prices, there is still considerable uncertainty about the final scope of the tariffs and policy responses in other countries. Geopolitical uncertainties also remain pronounced. These developments are expected to have an adverse effect on global economic activity, particularly if households and firms delay expenditure pending greater clarity on the outlook. This has also contributed to a weaker outlook for growth, employment and inflation in Australia. That said, world trade policy is changing rapidly, thereby making the central forecasts subject to considerable uncertainty. All of this could have been summaries as “Donald Trump”

Setting aside overseas developments, private domestic demand appears to have been recovering, real household incomes have picked up and there has been an easing in some measures of financial stress. However, businesses in some sectors continue to report that weakness in demand makes it difficult to pass on cost increases to final prices. This is a fancy way of saying if business do try to increase prices people won’t buy their stuff because people cannot afford to pay the higher prices.

At the same time, a range of indicators suggest that labour market conditions remain tight. Employment is continuing to grow, measures of labour underutilisation are at relatively low rates and business surveys and liaison suggest that availability of labour is still a constraint for a range of employers. Looking through quarterly volatility, wages growth has softened over the past year or so but productivity growth has not picked up and growth in unit labour costs remains high. Productivity is a LONG TERM issue. The RBA thinking about productivity when it makes a shift in the cash rate is rather silly. Also unemployment has remained at 4.1% for about a year, and in that times wage growth and inflation has fallen, so going on a bout a tight labour market is getting rather desperate.

There are uncertainties about the outlook for domestic economic activity and inflation stemming from both domestic and international developments. While the central projection is for growth in household consumption to continue to increase as real incomes rise, recent data suggest that the pick-up will be a little slower than was expected three months ago. This is them trying to explain that they were not wrong in April to keep rates steady, it was the data’s fault!

There is a risk that any pick-up in consumption is even slower than this, resulting in continued subdued growth in aggregate demand and a sharper deterioration in the labour market than currently expected. Alternatively, labour market outcomes may prove stronger than expected, given the signal from a range of leading indicators. Why not just say: things could be worse than we think, or maybe better.

More broadly, there are uncertainties regarding the lags in the effect of monetary policy and how firms’ pricing decisions and wages will respond to the demand environment and weak productivity outcomes while conditions in the labour market remain tight. The RBA pointing out that they don’t know how long it will take for rate cuts to have an impact. (another reason why they should have cut rates in April)

Maintaining low and stable inflation is the priority. Ok… but how about low unemployment?

The Board judged that the risks to inflation have become more balanced. Inflation is in the target band and upside risks appear to have diminished as international developments are expected to weigh on the economy. With inflation expected to remain around target, the Board therefore judged that an easing in monetary policy at this meeting was appropriate. The Board assesses that this move will make monetary policy somewhat less restrictive. This means that the RBA still thinks that the current cash rate is slowing the economy. Yep – they believe it is best that the economy be less strong than it is now!

It nevertheless remains cautious about the outlook, particularly given the heightened level of uncertainty about both aggregate demand and supply. The Board considered a severe downside scenario and noted that monetary policy is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia. ie more rate cuts are coming.

The Board will be attentive to the data and the evolving assessment of risks to guide its decisions. In doing so, it will pay close attention to developments in the global economy and financial markets, trends in domestic demand, and the outlook for inflation and the labour market. The Board is focused on its mandate to deliver price stability and full employment and will do what it considers necessary to achieve that outcome. They have gone from talking only about inflation and now mention full employment – ie the worry is about rising unemployment now rather than rising inflation.

Today’s decision to cut interest rates by 25 basis points is long-overdue good news for struggling home buyers. 

Borrowers have endured two full years of pain, as rates shot up quickly but started coming down slowly.

People are still hurting, and there’s no need to keep inflicting unnecessary additional pain.

“The Australia Institute welcomes the news that the RBA has finally acted by reducing the cash rate by 25 basis points,” said Greg Jericho, Chief Economist at The Australia Institute. 

“This cut goes some small way to redressing the failure to cut rates at its April meeting.

 “Households have been smashed by the rate rises which began in May 2022. Almost half of the increase in cost-of-living pressure on employee households is attributable to interest rate rises.

 “The pain of these rate rises continues. In the first three months of this year, spending on retail was flat as households continued to cut back on spending to pay mortgage bills.

 “The Reserve Bank should not end here. Over the past year, unemployment has remained at around 4.1%, and yet in that time, inflation has fallen from 3.8% to 2.4%, and private-sector wage growth has fallen from 4.1% to 3.3%. 

“There is no wage price spiral. There is no need for unemployment to rise. The Reserve Bank should focus on achieving full employment.”

The RBA admit that inflation dragon has been slain.

In its statement on the interest rate cut it said:

“Staff forecasts released today project that while headline inflation is likely to rise over the coming year to around the top of the band as temporary factors unwind, underlying inflation is now expected to be around the midpoint of the 2–3 per cent range throughout much of the forecast period.”