Does this make up for its bad call at the last meeting in July, when it left rates on hold?

No, because the data since the July meeting shows it should have cut again in August. So Australian borrowers are still at least one 0.25 per cent cut behind.

Unemployment is up, economic growth has almost completely stalled, and inflation is well and truly under control.

Cutting the official cash rate by 0.25 per cent to 3.6 per cent will be welcome relief for mortgage-holders, but interest rates are still restrictive. That means that rates are acting as a brake on the economy at a time when it needs a boost.

How far do rates need to fall before they are no longer weighing down the economy? This is known as the neutral rate. A rate that is neither slowing nor stimulating the economy.

It’s a bit fuzzy as to exactly what that rate is, but it is generally considered to start at around 3 per cent. So, we still need another two or three 0.25 per cent cuts on top of Tuesday’s, before rates aren’t dragging the economy down.

With headline inflation at 2.1 per cent, which is at the very bottom of the target band, all the talk has shifted to the underlying rate of inflation.

The underlying rate, also known as the trimmed mean, is the headline rate minus the volatile bits. It gives us an indication about where inflation is heading.

So, what is it telling us about where the rate of inflation is heading?

Down. The underlying rate has fallen every quarter for the past year.

Some have claimed that it’s because the underlying rate is not yet at the midpoint of the target band (it’s at 2.7 per cent), so it’s too early to be sure inflation is under control. This misunderstands the underlying rate.

The underlying rate changes more slowly than the headline rate. When inflation took off in 2022, the underlying rate did not increase as rapidly as the headline rate. This makes sense since the underlying rate strips out the prices of the biggest movers.

This also means that it decreases more slowly, again because it strips out those things that are falling most in price or growing at the slowest rate. The fact that the underlying rate is following the headline rate down, but more slowly, is exactly what we would expect.

When looking at the underlying rate, what is important is the direction it’s heading. And it’s only heading down.

If inflation is obviously under control and within the target band, then why is the Reserve so reluctant to cut rates?

Put simply, it’s because it’s worried that unemployment, or as the RBA would say, excess capacity in the labour market, is too low. It wants to see higher unemployment.

The RBA board wrongly thinks the current rate of unemployment means that if households suddenly have extra money to spend, because repayments on mortgages go down, businesses will struggle to find extra workers. They think businesses will have to increase pay to attract those limited workers, and they will pay for the higher wages through higher prices, which is higher inflation.

This highlights that the RBA does not understand the labour market.

What has been shown again and again is that the industrial relations system is rigged against them, and they can’t negotiate higher wages.

Don’t take my word for it. The RBA review in 2023 criticised the central bank for not cutting interest rates before the pandemic because it was convinced wages were about to increase.

Back then, inflation was too low. It was below the target band. But the Reserve wouldn’t cut rates because it thought that the unemployment rate was too low, and this would lead to higher wages and higher inflation. Sound familiar?

Of course, wages didn’t rise, and the RBA was eventually forced to cut rates.

It appears the Reserve Bank has learnt nothing from this.