Three graphs that show why the RBA was wrong not to cut rates

1. Headline and underlying inflation are well within the RBA target band.

The RBA is foremost obsessed with keeping inflation, as measured by the CPI, within the 2% to 3% target band. But headline inflation is currently 2.1%, at the very bottom of the target band. The RBA also considers underlying inflation, which is inflation with all the volatile parts stripped out. This is also within the RBA target band at 2.7%.

The CPI data shows that inflation is under control.

2. GDP is well below the long run average

The economy is growing very slowly. While it has picked up a small amount in recent months to be growing at 1.8%, this is still well below the long run average growth rate of 3.1%.

The pickup in household spending is most likely because of recent cuts in interest rates. But growth is still very low. Further rate cuts are needed to further grow the economy.

3. Unemployment is rising

The unemployment rate was recently at a historically low level of 3.5%. But over the last three years it has been steadily increasing and is now at 4.2%. Importantly the trend rate is steadily increasing. With low economic growth and continuing high interest rates, this is likely to continue.

The RBA should have cut rates

The facts are that inflation is under control, economic growth is low, and unemployment is steadily rising. These are all reasons for an interest rate cut. Despite this the RBA has again held rates steady.

The quarterly CPI numbers will come out before the next RBA meeting. These figures are likely to again show that inflation is under control, and this will hopefully spur the RBA to cut rates at their November board meeting.