The Shadow RBA recommends a hold today and further out probabilities are trending dovish though still hawkish:
“For the current (August) round, the Shadow Board’s position has shifted. Compared to last month, it now marginally favours holding the overnight rate steady: it attaches a 47% probability that this is the appropriate policy (compared to 39% in July), while only attaching a 46% probability to the need for another rate rise (56% in July)”.
“The probability attached to a required rate reduction equals 7%”.
“The probabilities at longer are as follows: 6 months out, the confidence that the cash rate should remain at the current setting of 4.10% strengthened from 15% to 26%; the probability attached to the appropriateness of an interest rate decrease equals 28% (compared to 26% in July), while the probability attached to a required increase equals 46% (down from 59%). The mode recommendation at this horizon is 3.35%, 50 bps lower than it was last month”.
“One year out, the Shadow Board members’ confidence that the appropriate cash rate should remain at the current level of 4.10%, equals 16% (compared to 14% in July)”.
“The confidence in a required cash rate decrease, to below 4.10% equals 44% (43% in July), and its confidence in a required cash rate increase, to above 4.10%, is 41% (43% in July)”.
“Three years out, the Shadow Board attaches a 10% probability that the overnight rate should equal 4.10%, a 72% probability that a lower overnight rate is optimal and a 18% probability that a rate higher than 4.10% is optimal”.
I expect a hold today. I also think the tightening cycle is very likely done.
My reasoning hangs on five points:
- the data flow is clearly weak in consumption and sentiment;
- house prices are stalling as investors bail with more ahead;
- the economy is in deep per capita recession which will deflate everything;
- goods inflation has much further to fall;
- services inflation will peter out in due course with falling wage gains as very weak leading indicators for employment come to bear.
Ahead is endless mass immigration, massive terms of trade shock as ex-growth China crushes commodities, and AI job losses.
Aside from the permanent AlboGreens rental shock, everything ahead is deflation.
Arguments that the RBA will hike once more to give Captain Bullock a red-carpet entry don’t gel with my experience of the bank.
Whatever its faults, the RBA always follow the data and it is saying stop hiking.
