Rate cut season may still be a long way off

On Tuesday the Reserve Bank of Australia pretty much knocked that on its head.

Like a grumpy dad flicking the light switch at an eighteenth birthday party, the central bank made clear that it thought any idea of a rate cut anytime soon was wildly premature.

While admitting that inflation is coming down more sharply than had been expected, RBA boss Michele Bullock told journalists at her first media conference that the fight to drag inflation down was far from over.

In her plain-spoken manner, the governor said the risks to the inflation outlook have come into balance, but that is still a significant way short of declaring that the job to tame it is done.

For now, a rate cut before the middle of the year seems a fairly remote prospect.

Even if inflation continues to slide in coming months, as is expected, the central bank is wary of easing off the brakes too soon, only to see inflation get stuck above 3 per cent or, even worse, begin climbing again.

After the searing experience of Ms Bullock's predecessor Philip Lowe, who posited rates could remain very low for an extended period, only to be mugged by the economy's rapid rebound from the pandemic, the RBA is leery of risking any need to backtrack.

This was on display at Tuesday's media conference when Ms Bullock flatly rejected the suggestion the November rate hike had been a mistake.

"We didn't make a mistake," she said. "The rise in November, the risks had shifted to the upside, and in order to mitigate some of those, to give a bit more assurance, that was the appropriate move at the time."

While the bank thinks the risks now are more even, the governor emphasised that the central bank was prepared to go either way, if it is warranted.

"We are not ruling out what we might have to do next," she said.

The central bank's concerns on at least one front appear to have receded.

Through much of last year it repeatedly voiced disquiet that the tight labour market could trigger a destabilising upward spiral in wages and prices.

But the RBA now appears much more relaxed, arguing that conditions in the labour market are easing, the rate of wage increases is levelling off and productivity will lift to it long term average.

So what will convince Ms Bullock and her fellow board members that rates can begin to come down?

A big part of the answer to that is bound up in the RBA's mandate to not only stabilise inflation but also aim for full employment.

Its goal has been to bring inflation down while limiting any increase in unemployment, eventually arriving at a balance between supply and demand in the labour market that is consistent with inflation at around 2.5 per cent.

But the governor was upfront that there is no single number that neatly captures where that point is.

Is it an unemployment rate of 4.4 per cent, as currently forecast for next year? Is it higher? Is it lower?

Ms Bullock said that, in the end, it will be a "judgement call".

"We have an idea that full employment is where we've got...unemployment at a level that inflation is low and stable in the band. That's [sustainable] full employment in our language."

As inflation continues comes down, more attention is set to turn to the labour market.