Reserve Bank governor Michele Bullock says central bankers are monitoring volatility on global sharemarkets, but that it did not factor into their decision to keep interest rates on ice in August.

Speaking after the RBA paused rates for the sixth straight meeting on Tuesday, Bullock also dashed hopes of near-term mortgage relief, suggesting market expectations of a cut in 2024 were wrong.

“Expectations for interest rate cuts are a little bit ahead of themselves,” Bullock said.

“Are we heading for a recession? I don’t believe so, and the board doesn’t believe so.

“We still believe we are on that narrow path.”

Bullock’s comments came after a sell-off in US markets earlier this week that also affected Australian equity prices.

It was sparked by weaker-than-anticipated employment data in the US and Japan’s central bank raising interest rates.

‘A bit rich’

Bullock said that while central bankers were monitoring the situation, the implications for the Australian economy weren’t serious enough to warrant it influencing August’s rate decision.

“Everyone felt that it was perhaps a bit rich – the valuations in the equity markets – particularly in the United States, so I think there’s been a readjustment there,” Bullock said.

Head of macroeconomic forecasting at Oxford Economics Australia Sean Langcake said that domestic economic factors, namely the outlook for inflation and employment, are much more central to RBA decision making about rates than volatility on global sharemarkets.

Westpac foreign exchange strategy group head Richard Franulovich said “it’s not clear that US recession risk is as high as markets make it out to be” in a note following the RBA rate call.

“A rebound in the US July services ISM and July JOLTS job openings do not suggest that US employment is rapidly losing momentum,” he said.

Extended interest rates pause likely

The cash rate target has been on hold at 4.35 per cent since November, with Tuesday’s decision broadly expected after recent data showed inflation easing as expected.

Langcake said that today was the “last best chance” the RBA had to increase rates if it viewed tighter policy as necessary to curb inflation.

That’s good news for mortgage holders because it means the economy is “out of the danger zone” when it comes to the prospect of  further rate hikes, though it will be a while before a cut happens.

“Clearly this is still a path [for inflation] they see as tolerable,” Langcake explained.

“The RBA is going to do nothing for quite a long period of time,” he also said.

Deloitte Access Economics partner Stephen Smith said the August pause reduces the risk of a recession “we don’t need to have” amid a weakening economy and volatile global markets.

“It is now looking increasingly certain that the next move in the cash rate will be down, not up,” he said.

“The RBA [is] clearly concerned that its quest to stamp out inflation might derail an emerging recovery.”

‘Very slow’ inflation fight

Alongside its decision to keep rates on ice in August, the Reserve Bank has also published an updated set of forecasts for the local economy that predict a slightly slower easing of inflation.

Central bankers still anticipate that price growth will fall back into the 2 to 3 per cent target band in late 2025 and approach the midpoint in 2026.

But the starting point is up slightly to 3.9 per cent amid stronger forecasts for demand and household spending than back in May.

Bullock said that while inflation is easing, the pace has been “very slow” over the past year, justifying an ongoing pause in rates.

“The fact is that the progress on bringing inflation down has been very slow,” Bullock said.

“There’s actually no guarantee that supply and demand will return to demand quickly enough.

“What we really need to see is the underlying pulse of inflation – we look at that as the trimmed mean – to start to come down further.”

One shift in RBA thinking has been around the gap between demand and supply, which is what generates price pressures.

Central bankers now think that gap is larger than previously thought and that the capacity of the supply side of the economy to meet demand is weaker.

Wages and productivity

One key wrinkle, Langcake explained, has been disappointing productivity growth, which has failed to return to pre-Covid levels.

That means upcoming wages growth data will be pivotal because the RBA now believes that growth in pay packets is running too fast.

Bullock reflected that sentiment on Tuesday, saying that it’s not clear that productivity will pick up enough to limit price pressures emerging from wages growth.

“What adds to inflation is unit labour costs, and unit labour costs are dependent on not just wage rises but what’s happening with productivity,” Bullock said.

“We do expect [productivity] to get back towards its trend level in the next year or so, but it’s possible that … if productivity doesn’t improve then even wage rises of around 3.5 per cent might not be enough to keep unit labour costs contained.”