The U.S. Federal Reserve announced on Sept. 18 that it would cut interest rates by half a percentage point. This move has been a big relief for financial and commodity markets but has added more pressure on the Reserve Bank of Australia (RBA) to bring forward its own plans for rate relief.
As many as ten key central banks have been trimming their key interest rates since last year, including those in the United States, the UK, Canada, the European Union, and New Zealand.
This is in contrast to Australia, where RBA Governor Michelle Bullock recently announced that a cut in interest rates is unlikely in the near future.
Peter Tulip, chief economist at the Centre for Independent Studies, says he is unsure if the decision by the U.S. Federal Reserve will impact the Australian market.
“The Australian yield curve has not changed much. Hence, things should not change at least for a few months,” he told The Epoch Times.
He further explained that it may have longer-term implications for Australian monetary policy.
“Most other central banks, including the Fed, raised rates more aggressively than the RBA. The Fed went up to five and a half percent. As a result, inflation came down quickly,” he said.
Meanwhile, the Australian cash rate was gradually raised from a low of 0.1 percent in 2022 to 4.35 percent, where it has remained since November 2023.
After learning from the U.S. market, Tulip suggested that the RBA should rethink its “gradualism” approach in increasing rates.
“The RBA has moved sluggishly, so it still has inflation remaining well above target. The success of the Fed’s strategy suggests that the RBA should rethink its gradualism,” he said.
In her address on Sept. 5, Bullock said that although inflation has dropped, it was “premature to be thinking about rate cuts.”
She maintained that policy will need to be “sufficiently restrictive until the RBA is confident that inflation is moving sustainably towards the target range.”
Meanwhile, this is the U.S. Fed’s first cut since early 2020, when it took rates down to zero to deal with the COVID-19 pandemic. However, it soon started increasing rates from March 2022. By July 2023, rates were at their highest level in recent times.
In his post-decision press conference, Federal Reserve Chairman Jerome Powell said the bank’s “recalibration” of interest rate settings should ensure strength across the economy and America’s jobs market.
Tulip says the Fed’s move to cut interest rates has not been surprising given the incoming data for the United States.
“The real surprises were that core inflation has fallen and the unemployment rate has risen. The Fed’s response to these was relatively standard practice.”
