In his statement accompanying Tuesday’s decision to leave the official cash rate (OCR) steady at 4.10%, RBA governor Phil Lowe reiterated the Banks’ forecast that Australia’s CPI inflation “will continue to decline, to be around 3.5% by the end of 2024 and to be back within the 2–3% target range in late 2025″.
Judo Bank chief economist Warren Hogan believes the RBA erred in not hiking because Australia’s inflation remains too high:
“The second pause now I think sends the wrong message to the community. I think the RBA is taking a lot of risks with our economy”.
“They were already one of the most dovish central banks… and they revealed that they are happy for it [inflation] to not get back to target until 2025”.
“They have effectively changed the inflation strategy… I think that’s a very dangerous shift”.
I strongly disagree with Hogan. Inflation is coming down in Australia (and globally):
Moreover, there is significant monetary tightening ‘built in’ to Australia due to the fixed rate mortgage cliff, which will see nearly 500,000 fixed rate borrowers reset from 2% mortgages to 6% mortgages over the second half of 2023:
Therefore, average interest rates paid by Australian households will continue to rise irrespective of whether the RBA continues to hike.
Indeed senior economist Callam Pickering also made the pertinent point on Twitter that “in the 2H 2022, core CPI rose at an annualised rate of 7.4%”.
But “in the 1H 2023, core CPI rose at an annualised rate of 4.3%”.
“Those big 2H 2022 figures drop out of the annual figure over the next six-months. Core inflation will likely end up between 3.75% and 4% by year end”, Pickering notes.
“The moderation is even larger when considering the monthly CPI. Over the past six-months, the CPI ex. volatile items has increased at an annualised pace of just 2.4%”.
“So it’s not exactly clear that anything needs to change over the next two years to get inflation back to target”:
We should also remember that two of the key drivers of Australia’s ‘sticky’ inflation – rents and energy prices – are unaffected by the RBA’s tightening.
The RBA should, therefore, cool its jets and let the 4.0% of cumulative rate hikes work their way through the system.
