Audio excerpt - Jim Chalmers:

“This is very welcome news for millions of Australians. This is the rate relief that Australians need and deserve.”

RUBY:

When the Reserve Bank finally delivered a rate cut yesterday, Treasurer Jim Chalmers was quick to claim credit.

Audio excerpt - Jim Chalmers:

“Under this Labor government, inflation is down, wages are up, unemployment is low and now interest rates are falling as well.”

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RUBY:

It’s happy timing for a government with an election looming.

But for mortgage holders, relief may be modest. And with the RBA warning they don’t expect to cut rates again soon, how much mileage the government will get out of this remains to be seen.

RUBY:

From Schwartz Media, I’m Ruby Jones. This is 7am.

Today, managing editor of The Saturday Paper Emily Barrett on the impact of the Reserve Bank’s cut, and what it tells us about the state of the economy.

It’s Wednesday, February 19.

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RUBY:

So, Emily, we've just heard perhaps the most talked about cash rate announcement in recent memory. There was so much speculation, so much weighing on this moment for many people. So to begin with, just tell me what the governor of the Reserve Bank, what Michelle Bullock said.

EMILY:

Yeah, so I mean this is the first cut in four years. And it follows 13 hikes that went from May 2022 to November 2023. Now, the aim of those hikes was to bring down inflation, which peaked at 7.8%. And that was well above the bank's 2 to 3% target range. So what Michelle Bullock was delivering was good news.

Audio excerpt - Michelle Bullock:

“Good afternoon. Thank you all for coming. As you know, the board decided today to cut the cash rate by 25 basis points to 4.1 per cent. The cash rate has been at 4.35 per cent since November 2023.”

EMILY:

She said, you know, that they had determined that inflation had come down enough for them to actually make the cut, but it's what's known as a hawkish cut, which means don't expect too much more.

Audio excerpt - Michelle Bullock:

“I want to be very clear that today's decision does not imply that further rate cuts along the lines suggested by the market are coming. As I noted, we've removed the cautionary increase that we did in November 23 to a level that we still see as restrictive. But the board needs more data and evidence that inflation is continuing to decline before making decisions about the future path of interest rates.”

RUBY:

Okay. And the most obvious immediate effect of this will be felt by people who own property. So what do we know about whether the banks intend to pass on this cut? And if so, what does that mean in practical terms for people who have a mortgage?

EMILY:

So the big four banks, they've apparently already given their commitment to pass it on quickly. And that's something that Jim Chalmers, the treasurer announced almost immediately afterwards. And with all the competition in the mortgage market at the moment, it's certainly in their interests to follow up. So we would expect that this month. And this will flow to most Australians with mortgages because they hold variable loans.

So if we look at one third of Australian households have mortgages, another one third are paid off and another third are renters.

So according to the RBA, the minimum payments for most mortgages jumped sort of between 30 and 60% since the first rate hike in May, 2022. So if you had a $500,000 loan, your monthly repayments would have increased by about $1,200 a month over that time. So today's cut is modest in the sense that mortgage holders can look at around, sort of $100 a month maybe in savings from this cut. So an extra $100 a month for these mortgage holders. You know, anyone who's looking for that extra bit is going to be helpful. But I think there's one reporter who actually said in the press conference, it will barely touch the sides for some people.

RUBY:

And as you say, Governor Michelle Bullock spoke about this being a one-off, not to expect further consecutive cuts. So can you tell me more about why that is?

EMILY:

Yeah, so as they pointed out, the key measures of inflation show that it's returned back to the RBA's 2% to 3% target range, and that's quicker than expected. But there's still a little bit further to go.

Part of the reason that they have cut rates is that they're concerned about growth in the economy, but they're also concerned on the flip side that productivity, that is how much stuff we're actually making, is really low. And so the output of this economy isn't as strong as it needs to be for supply to meet demand,

Audio excerpt - Michelle Bullock:

“But we all know that productivity hasn't been as strong as we would have hoped and that's the way we grow the economy. That's the way that we can have trend growth higher because if demand increases and supply doesn't then that's when you get inflationary pressures.”

EMILY:

Also, there's the point that house prices are still high. So a series of cuts would kind of risk reigniting that demand in a market that probably hasn't cooled as much as it could have. And there's also just a lot of uncertainty out there. I mean, if we look, it's, we're in an election campaign shortly. So domestically, you know, election campaigns tend to mean more government spending, more promises around spending, which is in itself often inflationary.

The global outlook, if we look beyond this country, we've got highly unpredictable situation. I mean, economists always say, you know, there's uncertainty out there, which is very boring, but it’s fair to say this is an extraordinarily unpredictable outlook. We've got we're looking at potential trade wars. That's inflationary.

And to compound that, the Australian dollar is pretty weak right now. And so further rate cuts weigh on the Australian dollar. And that increases the cost of imports. That's also an inflation driver.

But the main thing that they pointed out as a risk is that the jobs market is still really strong.

RUBY:

Right, can you tell me more about that? Because economists are often saying that to get inflation under control we need unemployment to rise, but that hasn’t happened here.

EMILY:

Yeah, so central bankers have been obsessed for a long time with the links between unemployment and inflation and interest rates.

But this time around, we haven't had unemployment go as high at all people to suffer in terms of their jobs as much in the sort of task of lowering inflation. So there are a few reasons for that.

You sort of need to take into account how the economy is changing a lot. Structurally, there are a lot of differences. There are more working gig economy jobs. There is part-time work and measures of underemployment that kind of aren't really captured in that headline rate.

And importantly, we know that wage growth, at least in this case, wasn't fueling inflation at all to the extent that, you know, it has in the past. Because we know that because wage inflation, like how much your pay was going up each year, was actually being outpaced by inflation. So your pay wasn't keeping up with inflation, so it can’t have been driving it. I mean, it's certainly clear that while the jobs market has held up, that still doesn't kind of offset the fact that we've seen people having to pay extraordinary amounts more each month for their mortgages and make really painful decisions about, you know, are they going to pay their bills? Are they going to pay their mortgage or are they going to buy enough food to put on the table?

RUBY:

After the break - how much credit should the government get for the rate cut?

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RUBY:

Emily, the RBA was able to do this because inflation has come back within their target range between that two to three percent. And there was a lot of criticism of the Reserve Bank for these constant hikes, these 13 consecutive hikes over the past four years. People saw it as this blunt instrument to curb inflation. But does the fact that inflation is slowing and we are now seeing a cut prove that despite perhaps being unpopular, the RBA strategy did work here?

EMILY:

You can't say that RBA policy hasn't worked because inflation has definitely come down. Right. But the question is always at what cost? And as you're saying, you know, the blunt instrument is really it's absolutely the case that raising interest rates to this extent hurt a tremendous number of people.

And we've definitely, look, we've definitely seen some criticism of what the RBA has been doing. That is, that's come from a lot of different places, including from the treasurer, from Jim Chalmers, who, you know, who's normally very circumspect about reinforcing the central bank's independence. He said fairly recently that the RBA was slamming the economy. That's just to show the level of frustration that has been building about the fact that interest rates have stayed this high for this long.

But you know, what Michelle Bullock was saying today is that inflation is bad, rate hikes are bad, but you really don't need for inflation to get further out of control because then there's just more rate hikes.

RUBY:

Emily, this rate cut, it's obviously good news for the Albanese government who can now use it to talk about their handling of the economy and paint a good news story about successfully battling inflation and addressing the cost of living. How much momentum do you think they can get out of this?

EMILY:

They certainly want to capitalise on this moment. We're already seeing it with Jim Chalmers out very quickly after the announcement. But in terms of how much momentum they can get out of it going ahead, it's not exactly a massive boon for people's budgets to be seeing this extra money in their pockets each month. It's not a large amount. So there's perhaps that sense that, you know, if they try to make too much of it, then people will sort of be looking at their bank accounts and thinking, well, actually, I haven't seen that much back from this.

It's very delicate as we're heading up to the election. Labor knows exactly how much trouble there could potentially be in here. The ABC's analysis has shown us that there are some of Labor's marginal seats are feeling really have taken the brunt of the higher mortgage costs. And we look at seats like McEwen and Holt in Victoria, Pearce in WA, they have the highest proportions of mortgage holders in the country, around 50 % of people living there. So, you know, I think that it's quite likely that the government is going to want to be talking about how their economic management has made this possible. And certainly in light of how much inflation has come down, they have something to claim there.

RUBY:

Can you tell me more about that Emily, to what extent can the federal government claim this? Are there policies that you think have had a real impact or is this lowered inflation rate all just a consequence of what the Reserve Bank has done over the past four years?

EMILY:

Yeah, so that's a really good question. So there's always a bit of push and pull, right? How much is fiscal policy? That's the government's actions to do with this. And how much of it is monetary policy, which is the central banks' input? They're always pointing fingers at each other when things are going wrong. But the government does deserve some credit. That’s resisted the temptation to spend more in a cost of living crisis. Obviously, the populist move would be to try and shovel more money out the door. It made some decent calls on balancing support for households. We remember that enerh=gy bill subsidies, which actually helped to bring headline inflation down. That obviously was sort of kind of decried as a bit of trickery on the part of some people because it was sort of an artificial suppressing of inflation.

But it's still, you have to say it was a deft way to give people some kind of cost of living relief, which we know that people needed without sparing inflation. And for its part, the RBA can say that as blunt at all as it is, interest rates have done the job here to a certain extent. They could also say, as central banks often do, that heavy government spending doesn't help to tame inflation. Government spending is pretty high historically. It's now around 29% of GDP. And that's probably more than they would be comfortable with. It's just that how do you argue against that when people really need the help?

RUBY:

Emily, thank you so much for your time.

EMILY:

Thank you so much, Ruby.

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RUBY:

Also in the news today,

The National Anti-Corruption Commission will investigate six individuals referred to the body by the robodebt royal commission.

The announcement follows an independent review into the anti-corruption watchdog's refusal to investigate the six individuals, five public servants and one public official in June of 2024.

The names of the individuals have not been released.

And, New South Wales police have charged a man with the alleged online harassment of journalist Antoinette Lattouf.

The 61 year old from regional New South Wales has been charged with using a carriage service to menace harass or offend, and is due to appear before court in March.

Lattouf says she received a number of hateful and racist messages since being taken off-air from her fill-in host role on ABC Radio Sydney after sharing a post on social media regarding the Israel-Hamas war.

I’m Ruby Jones, this is 7am. See you tomorrow.

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