Since the pandemic central banks of developed countries have been
The Reserve Bank of Australia (RBA) has paused the cash rate once again - for the sixth time in a ROW!
And while its decision to pause the cash rate was predicted by most pundits, there was a serious stir in the lead up to the big decision.
And it’s all because last week, the US Federal Reserve (aka the Fed) cut its cash rate for the first time in four years.
Traditionally, the RBA and the US Fed’s relationship has been a lot like The Plastics, orbiting around Regina George.
So when the Fed cut rates last week, the news had many people in Australia more impatient for a rate cut than kids on Christmas morning.
But 2024 is shaping up differently.
Remind me, why does the US Federal Reserve’s decision matter?
When the RBA last met in June, we spoke about how the RBA and most other central banks tend to follow the US Federal Reserve as the US dollar is considered the ‘world currency’.
Central bank decisions don’t just impact interest rates, they impact exchange rates too.
That’s why the Federal Reserve's decisions impact how other central banks like the RBA handle interest rates too.
Or at least it used to…
During the pandemic, and post-pandemic recovery, there was a period where the central banks of developed countries synced up ie. they were all hiking up the cash rate to tackle inflation.
The US Fed was the first, followed by the RBA, then the European Central Bank, Canada, New Zealand, England, and finally Japan.
But in 2024, we’ve started seeing some divergence in how these central banks are operating.
What have the other banks been up to?
In June this year, we saw the European Central Bank and the Bank of Canada cut their cash rate for the first time since 2022.
In August, the Bank of England announced its first cash rate cut since March 2020.
Earlier this month the Central Bank of New Zealand, and the US Federal Reserve followed suit.
Why did the US finally decide to cut interest rates?
As we’ve seen, increasing interest rates requires Simone-Biles-level-flexibility to balance both curbing inflation and keeping the economy stimulated enough to avoid a recession.
And it’s a central bank's job to maintain that balance.
Now, the USA's decision was a signal to the global economy that post-pandemic inflation is coming to an end and prices are finally coming under control.
But, while the US central bank has managed to get prices under control, the country is also facing what economists like to call a “softer labour market”, which means rising unemployment.
We’re talking a jump from 3.7% to 4.2% since the beginning of the year.
So the US’s decision to rein back the strict stance on inflation sort of checks out.
But why is the RBA refusing to join the crowd?
Observing the other central banks from developed countries, it’s pretty clear that Michele Bullock and her fellow economists are playing their own game - entirely.
Put simply, the RBA is trying to get the best of both worlds.
It wants to bring down inflation, but it doesn’t want to compromise on economic growth and unemployment.
But it’s operating in an economy that looks very different to its comparable countries.
In the US, the labour market is softening, so the central bank is too.
In fact, according to the US Household Survey, there’s been no net new jobs created in 2024.
Our job market in Australia is prettaaay tight. This year, employment rose at an annualised rate of 2.7%, which is considerably higher than the long-run average of about 2%.
So while other central banks are dropping rates to re-stimulate their economy, the RBA is staying cautious so that we don’t compromise on “sustainable growth”.
And while we’ve got our fingers, toes, eyes, and arms crossed, if we hold our breath for a rate cut to happen on this side of the new year, we’ll probably turn very blue.
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