Data from the Australian Bureau of Statistics on Thursday showed employment fell by 14,600 in December from November, missing forecasts for an increase of 22,500 jobs. Yet, the jobless rate held at 3.5 per cent, just above a 48-year trough of 3.4 per cent, with the full-time component adding a healthy 17,600 jobs last month.
The strength of employment means more people earning and spending, keeping demand for labour robust with vacancies at historically high levels. This resilience is a major reason financial markets still believe the RBA will raise its 3.1 per cent cash rate by another 0.25 percentage points when it meets on February 7.
Interbank futures imply about an 82 per cent probability of such a rise, and an 18 per cent chance it will stay on hold at 3.1 per cent. The central bank has lifted rates by 3 percentage points since May 2022, and the full effect on mortgage holders is only just being felt.
If QIC is right about two interest rate increases in February and March, that takes the cash rate to 3.6 per cent before the pause arrives.
Back to neutral
“The RBA can be patient on where they take monetary policy. They don’t need to drive a recession to squeeze out demand to get inflation down sharply,” Peter says.
“As long as inflation is coming down, and as long as the market still has confidence as measured by inflation expectations that the central bank is going to get inflation under control over the longer term, they’ll be patient.”
The Melbourne-born economist pencilled in the first interest rate cut next year, and argues that only 0.25 percentage points of easing would be necessary to bring the cash rate back to neutral. He estimates the level where monetary policy is neither stimulatory nor contractionary to be 3.5 per cent.
Peter expects the Fed will raise its benchmark rate close to 5 per cent to rein in inflation, and cut it sharply thereafter to get it back to equilibrium.
QIC expects the US to tip into a short and shallow contraction this year, lasting for two quarters in downturn. The chief economist is more pessimistic about the eurozone and the UK, where he anticipates a deeper recession than the US, but not as severe as the ones experienced during the pandemic or the 2006-08 global financial crisis.
Relief in sight
Peter believes inflation has turned the corner globally with all major drivers of price growth in 2022 – from energy to housing costs and food – trending down.
He notes that Australia is slightly out of sync with the rest of the world because weather shocks are keeping local food prices elevated, while electricity prices and rents are still rising.
Even so, he is confident the cost of living in Australia will lag the rest of the world. He expects headline inflation to peak at 8 per cent, below Europe and the US, in a “slow-ish decline through the year”.
“It will take a while for the RBA to get inflation back within its target band, but nonetheless the trend will be down,” he says.
Peter welcomes the RBA’s admission of a policy mistake when the central bank said last year that the disorderly exit from yield curve control caused market dislocation and damaged its reputation. But he regrets that it came too late.
The controversial yield curve control policy met an undignified end in 2021 as early evidence of rising inflation led the market to push the RBA to capitulate. The central bank eventually abandoned the policy, which sought to match the three-year bond rate to the cash rate.
“They kept on [arguing] that the policy was correct given the information they had,” Peter recalls, “and that reluctance and lateness to admit the mistakes were the issue, rather than the fact they made a mistake”.
He blames the RBA for being “too inward-looking” and for its unwillingness to take on the views of the market. In that regard, he has witnessed improvement.
“The RBA has become more reflective on what they’ve been doing and that gives us confidence that they understand better policy going forward and that they’re now on a trajectory of policy that speaks for the current economic environment.”
As for the Bank of Japan – which held its ground this week in the face of mounting market pressure over the BoJ’s own iteration of yield curve control – Peter believes that it has made the same mistake as the RBA.
“One could argue the Bank of Japan played a little bit harder in that they resisted the immediate market onslaught to get them to break yield curve control,” he says. “[But] the Bank of Japan no doubt will come under increasing pressure to either break yield curve control or expand the range yet again.”
In his spare time, the economist can be found on the slopes.
In fact, this is where he met his Italian-born wife as a young traveller, when he went to visit the Italian Alps. Transiting from Milan station, Peter bought what he thought was a ticket to the ski resort of Bormio, north of Lake Como and near the Switzerland border.
“I didn’t speak Italian and the person misunderstood what I said,” he recalls.
He had a suspicion he was headed the wrong way but was unable to do anything about it due to the language barrier. He ended up in the ski town of Madesimo, 145 km from Bormio.
But since he had come to ski, he decided to spend a week there exploring the 60 km of downhill slopes. “And of course, you know, one thing led to another. I ended up spending my whole holiday there, and the rest is history.”
Happily, he also discovered traditional Lombard food during his annual visits there of which his favourite dish is pizzoccheri, a type of short tagliatelle made of wheat flour, layered with cheese, and dressed with garlic butter.
“It’s terribly unhealthy, but it’s an explosion of flavour,” he says, adding that the meal, traditionally a poor person’s dish, has become trendy after being rediscovered by young chefs.
“It is the ultimate comfort food.”
Peter eventually mastered the Italian language, “enough not to get in trouble”, he confesses. “I’ve got a fairly wide vocabulary and can get on just about any topic, but the grammar is often lacking.”