No more rate cuts, RBA deputy governor predicts

Speaking to ABC News last Thursday (8 January), RBA deputy governor Andrew Hauser clarified the RBA’s position that there would most likely be no further rate cuts in the medium term.

“[In December] the Governor said that in light of the most recent inflation data, … the likelihood, at least in the near term, of further rate cuts was probably very low. That’s still true, I think, if I’m honest with you,” Hauser said.

While he noted that November’s cooler-than-expected monthly inflation reading, at 3.4 per cent, was a welcome development, inflation still remained above the RBA’s target.

“It ticked down [in November]. That was helpful. But it was largely as we had expected, and we, as you know, will be waiting for the quarterly inflation in about two or three weeks time before we take a view on where we think inflation is today,” he said.

“But inflation above three per cent, let’s be clear, is too high. We’re charged to keep inflation between two to three per cent and it’s currently above that.”

As significant geopolitical and economic uncertainties surround the year ahead, Hauser said the RBA would be keeping a close eye on international developments. Key risks related to geopolitics and the AI stock bubble.

“The bad outcome would obviously be that some of these potential geopolitical flash points, including in Asia, crystallise and become real,” Hauser said.

“That people lose confidence in what are obviously exceptionally high valuations for technology stocks and others, and that the financial market pricing, which is certainly extreme, adjusts downwards. Australia won’t escape some of the consequences if that happens, and we need to be ready for it.”

Regardless, he noted that Australia was in a good position to weather shocks, and noted that AI developments and stimulus packages being unleashed in many countries could lead to more positive outcomes for the global economy.

Hauser added that there were a “number of scenarios” where interest rates could be cut next year, but not all of them would spell good news for the economy. For example, a global shock that weakened demand or a sharp loosening of the labour market could compel the RBA to cut interest rates, however these would be “unwelcome outcomes.”

On the contrary, if the supply capacity in the economy were to be greater than expected, the RBA could have more scope to cut interest rates without sparking inflation. However, the RBA’s current view was that capacity utilisation remained high.

“Firms are operating at reasonably high capacity. That’s a good thing. It means that there aren’t loads of spare resources, people out of work, lying around,” Hauser said.

“But it does also mean that there may be less scope to expand production without inflation also picking up. If that were to be the scenario behind the pickup in inflation, that actually we’re bumping against the bumpers, we could be seeking a less optimistic profile from interest rates.”