MNI INTERVIEW: RBA To Hold Rates Steady For Some Time - Tulip

The Reserve Bank of Australia is unlikely to make further policy cuts as economic activity remains resilient and inflation stays under upward pressure, a former senior official at the bank told MNI.

Peter Tulip, chief economist at the Centre for Independent Studies and former senior research manager at the RBA, said recent employment growth volatility was typical of monthly data, noting the unemployment rate had largely remained steady. “Basically at this point I think the RBA should and will hold rates steady for a while,” he said.

Markets, which have pared back expectations of another cut this year from the current 3.6%, but still price in a reduction by late Q1, were likely overzealous, he added. 

“I would think the market profile only makes sense if we get better news on inflation than the RBA is expecting," he argued. "If inflation comes in as expected, then I don't think the RBA is likely to cut."

Recent monthly CPI data showed persistent inflationary pressure, prompting some analysts to suggest that Q3 trimmed mean inflation, due Oct 29, could come in higher than expected. (See MNI INTERVIEW: Stronger Q3 Inflation To Limit RBA Easing)

Tulip added that uncertainty over labour costs and productivity remained a key risk to the inflation outlook. “One of the big uncertainties hanging over the forecast is what's happening with labour costs, and in particular, productivity,” he said. “Labour costs have been rising strongly and historically that hasn’t been a reliable guide to near-term inflation, but many businesses set prices based on unit labour costs. There's always been this disconnect in inflation forecasting and it's always a bit of a worry."

While he agreed with the RBA’s approach of placing little weight on the strong growth in unit labour costs, he noted the dynamics were still poorly understood.

Tulip noted in June that markets had likely overestimated the chances of a July rate cut, before the RBA surprised by holding the cash rate steady at that meeting. (See MNI: RBA Rate Cut Expectations Overblown- Ex-Officials)

CREDIT GROWTH TREND

Pushing back on the view that strong credit growth relative to wages indicated loose monetary conditions, Tulip said the RBA would “look through” such comparisons.

“Credit growth is driven by a lot of things,” he said. “What we’re seeing is a response to what’s happening in the economy – it’s an effect, not a cause – and in particular, it’s driven by rising house prices.”

Attitudes within the RBA toward credit growth tended to be mixed, he added. “There are economists who think credit growth matters for something, and the RBA tends to be polite when it’s discussing those views. In contrast to me, I think they’re just wrong,” Tulip said.

“The big question the Reserve Bank needs to ask is whether interest rates should go up or down, which depends on the forecasts for inflation and unemployment. The question of whether monetary policy is restrictive or loose – even if you could answer it – isn’t particularly useful. The results vary enormously depending on how the neutral rate is defined.”