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Neutral Rates Are Shifting Sands

• Central banks provide vague and evolving estimates of neutral rates that are unreliable guides to policy decisions, although these estimates inform the perceived terminal rate.
• Resilient labour markets and persistent unit labour cost growth challenge the dovish view that policy rates are well above their neutral settings, urging caution.
• Neutral estimates gradually drift to explain the prevailing regime, which doesn’t prevent a pause in cuts or a return to rate hikes consistent with historical norms.

By Philip Rush

Australia: Cash Rate Held At 4.35% (Consensus 4.35%) in Dec-24

• The RBA held the cash rate at 4.35%, reflecting a cautious stance amid persistently high underlying inflation. This outcome is consistent with projections of meeting the 2.5% target by 2026.
• Domestic economic activity remains subdued, with weak GDP growth and constrained household consumption. Nonetheless, tight labour market conditions and weak productivity sustain inflationary pressures.
• Future rate decisions depend on inflation trends, labour market adjustments, and global economic developments. The Board emphasises data dependency to balance inflation control against employment stability.

Australia: Cash Rate Held At 4.35% (Consensus 4.35%) in Nov-24

• The RBA board kept the cash rate steady at 4.35% to sustain the restrictive stance needed to bring inflation down, aligning with projections of achieving target inflation by 2026.
• Persistently high underlying inflation and a resilient labour market suggest continued excess demand, reinforcing the cautious approach towards easing.
• Future rate decisions will depend on domestic inflation trends, labour market dynamics, and global economic developments, particularly the Fed and ECB policy moves.

No Alarm From Global Cycle

• Broad increases in the flash services PMIs reinforced the signal that global activity remains resilient enough not to require forceful monetary easing.
• Residual seasonality hasn’t appeared in the PMIs again this summer, but it pollutes some unemployment data. A slight majority of countries have a higher UR than a year ago.
• Softening labour market trends from a relatively neutral cyclical position are consistent with gradual and limited rate cuts, even if they need reversing without a recession.

By Philip Rush