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Reserve Bank governor opens door to February interest rate cut, but will she walk through?

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This is a reporter's view of the RBA governor's post-meeting press conference. (ABC News: Michael Janda)

There was plenty of pre-Christmas cheer at the Reserve Bank press conference.

Michele Bullock had a spring in her step and stayed back for about 15 minutes after the presser ended to talk with a gaggle of journalists who had hung around.

With the next RBA board meeting not until February, like most white-collar workers, the central bank's governor is taking a little bit of time off to enjoy a Christmas staycation.

While the mood was seasonally jolly, borrowers didn't get the surprise Christmas gift they craved.

As fully expected, there was no December rate cut. The cash rate remains at its highest level in more than a decade at 4.35 per cent.

But Ms Bullock and the RBA board she leads did leave borrowers with the gift of hope.

"The board wanted to give the message that they have noticed some of the data that has been softer," she said.

It would be hard not to notice the weakest annual economic growth, outside of the pandemic lockdowns, since the early 1990s recession.

Why productivity is key to any future rate cut

Photo shows People on platform and at the departures board at Sydney's Central train station

Reserve Bank governor opens door to February interest rate cut, but will she walk through?

It's the RBA's latest buzzword for justifying why interest rates need to remain at restrictive levels. But while everyone agrees we have a productivity problem, solving it is another challenge entirely.

"The national accounts, obviously, was quite important, momentum there wasn't quite as strong as we thought it could have been," Ms Bullock said in understatement.

"We have observed that the WPI [wage price index] came a little bit lower than we thought it might be."

On the flip side, productivity growth remains weak and there are early signs since those September quarter GDP numbers that consumers are starting to open their wallets just a little bit wider.

The net result for the interest rate outlook?

"I honestly don't know if we're going to be cutting in February," Ms Bullock said.

"We're going to be looking at the data and be data driven."

Those comments at the press conference backed up wording in the board's post-meeting statement that it was "gaining some confidence inflationary pressures are declining" and "some of the upside risks to inflation appear to have eased".

Reserve Bank governor opens door to February interest rate cut, but will she walk through?

RBA governor Michele Bullock says the board wanted to publicly acknowledge recent softer economic data. (AAP: Bianca De Marchi)

50-50 chance of a February rate cut

That kind of language sees the odds of a February rate cut now stand a little better than 50-50, with markets fully pricing in at least one cut by early April and nearly half-a-percentage point of interest rate reductions by May.

That is when most local economists are still forecasting the first RBA rate cut.

But some changed their mind today, such as Deutsche Bank's Phil O'Donaghoe, while the few holdouts forecasting a February rate cut, such as CBA and JP Morgan, claimed some pre-emptive vindication for sticking to their guns.

Several others who had recently pushed their forecasts from February to May, such as AMP and Westpac, were hedging their bets back towards an earlier cut.

"I don't think we're quite tipping in the direction of changing our call back at this stage, but the RBA's changing language and acknowledgement that the decline in inflation is on track and that wages growth has actually undershot their forecasts is all very welcome," Westpac chief economist, and former RBA assistant governor, Luci Ellis told The Business.

A little less conversation, a little more action

But, as they say, talk is cheap and forecasts of rate cuts don't meet the repayments of those struggling, especially in the outer-suburban mortgage belts like Marsden Park in north-west Sydney, where our reporter David Chau spoke to some very angry borrowers.

"We need some action soon. If it's only talk, it gets us nowhere."

But it's not just individuals struggling with their debts who might suffer if the RBA's actions don't live up to hopes of a rate cut soon.

Dr Ellis says the whole Australian economy, particularly the jobs market, is being supported by a massive growth in publicly funded sectors — such as health, aged care and education — which can't go on forever.

"When this ramp up ceases, and we no longer see outsized growth in employment, we could see quite a sudden unravelling of the labour market," the former RBA economist told The Business.

"It could be quite difficult for the market sector to bounce back again at that point that non-market health and social care employment slows."

Basically, Ms Ellis is warning that the RBA may be confusing a transitional period of public sector expansion with a longer-term trend, and the Australian economy could be in for a big shock when this transition ends, if rates are still too high and the private sector isn't ready to pick up the slack.

"We don't expect that in the next few months, but it is something we need to be alert to later in 2025," she added.

RBA risks falling behind if it doesn't cut rates soon

And it's no good cutting rates after this spike in unemployment occurs.

Lags in the transmission of monetary policy through the economy mean the effects of a rate cut don't really start being felt for at least six months, and the full effect can take between a year and 18 months to occur.

So, if the RBA waits until May to start cutting and the jobs market tanks in the second half of next year, its rate cuts won't start stemming the jobless queues until sometime in 2026, by which time they could be quite long — just ask the Kiwis or Canadians.

Lower rates and recession

Photo shows Composite picture of Angus Taylor, Michele Bullock and Jim Chalmers

Reserve Bank governor opens door to February interest rate cut, but will she walk through?

Australia's latest national accounts show why we probably would have had to be in recession to have seen an interest rate cut this year.

If, as the Reserve Bank now firmly believes, the economy is evolving broadly in line with its forecasts, inflation is expected to be at the midpoint of its target band by the end of 2026.

Given the lags in monetary policy, that means you broadly want to have the cash rate back close to a neutral level — where it is neither boosting nor restraining the economy — by the end of next year to avoid undershooting the target.

The RBA's models currently centre on an estimate of the neutral cash rate in Australia being around 3.25-3.5 per cent. The cash rate sits at 4.35 per cent.

Perhaps not coincidentally, financial markets are currently betting on the cash rate falling to around 3.5 per cent by late 2025, and the RBA uses that pricing for the path of the cash rate in its economic models.

So, unless there are any so-called upside surprises, the RBA will probably need to cut the cash rate three or four times next year.

Given it now only has eight meetings a year instead of the 11 it used to have, it wouldn't be any great surprise if it decided to get started earlier rather than later.

The biggest surprise is how long it seems to have taken the RBA to come to this realisation.

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