The RBA has every justification to raise official interest rates at next Tuesday’s RBA board meeting by 0.25% to 3.85%. But will they?
Inflation is up to 3.8%. Even the RBA’s preferred trimmed mean inflation measure came in at 3.3% for the December quarter. Both measures sit above the RBA’s upper 3% target band; unemployment remains low, consumer confidence and spending have recovered and let’s not forget the red-hot housing market.
Inflation has risen too far beyond being palatable for the RBA to keep interest rates on hold and for them to hope that inflation tracks lower over time.
Hold-and-hope has been a strategy that has worked well for the RBA in the past. However, at this stage we don’t know if inflation’s resurgence is temporary or structural. Given this it makes sense that the RBA taps the brakes and takes out some insurance by raising interest rates by 0.25% in case it is structural. Hopefully, this and some accompanying scary language from the RBA will avoid further hikes down the track.
Is the inflation genie back out?
The RBA has an understandable and perennial paranoia surrounding the possibility of the inflation genie escaping the bottle again and it is this nightmare scenario that keeps the RBA Governor up at night.
We all know the pitched and bloody battle the RBA had to fight between 2022 – 2024 to regain control of inflation when they raised interest rates 13 times, albeit from a much lower starting point. They won’t want to go through that again.
Interestingly during the 2022 to 2024 hiking cycle, official interest rates in Australia peaked about 1% lower than other major developed economies while maintaining strong employment. The RBA was considered ‘The Guru’ for its deft management. However, I wonder if this prevented lingering inflation in Australia from being properly snuffed out and has contributed to the current resurgence?
The RBA in a bind
The RBA is in a bind. If they hold, they may allow inflation to become more entrenched and require greater hikes down the track. If they hike, they will be smashed from pillar to post and it will be seen as an embarrassing turnaround having cut interest rates just over 6 months ago.
If the RBA hikes, it will be the first major central bank in the world to raise interest rates in this cycle. Let’s hope that if the RBA hikes it’s a one and done. Whatever the RBA does the decision will be pivotal.
Let’s see!
Please Note – the thoughts and ideas expressed in this Bordez Commentary are my own and not with assistance from artificial intelligence (AI)
The question on everyone’s lips
The RBA has every justification to raise official interest rates at next Tuesday’s RBA board meeting by 0.25% to 3.85%. But will they?
Inflation is up to 3.8%. Even the RBA’s preferred trimmed mean inflation measure came in at 3.3% for the December quarter. Both measures sit above the RBA’s upper 3% target band; unemployment remains low, consumer confidence and spending have recovered and let’s not forget the red-hot housing market.
Inflation has risen too far beyond being palatable for the RBA to keep interest rates on hold and for them to hope that inflation tracks lower over time.
Hold-and-hope has been a strategy that has worked well for the RBA in the past. However, at this stage we don’t know if inflation’s resurgence is temporary or structural. Given this it makes sense that the RBA taps the brakes and takes out some insurance by raising interest rates by 0.25% in case it is structural. Hopefully, this and some accompanying scary language from the RBA will avoid further hikes down the track.
Is the inflation genie back out?
The RBA has an understandable and perennial paranoia surrounding the possibility of the inflation genie escaping the bottle again and it is this nightmare scenario that keeps the RBA Governor up at night.
We all know the pitched and bloody battle the RBA had to fight between 2022 – 2024 to regain control of inflation when they raised interest rates 13 times, albeit from a much lower starting point. They won’t want to go through that again.
Interestingly during the 2022 to 2024 hiking cycle, official interest rates in Australia peaked about 1% lower than other major developed economies while maintaining strong employment. The RBA was considered ‘The Guru’ for its deft management. However, I wonder if this prevented lingering inflation in Australia from being properly snuffed out and has contributed to the current resurgence?
The RBA in a bind
The RBA is in a bind. If they hold, they may allow inflation to become more entrenched and require greater hikes down the track. If they hike, they will be smashed from pillar to post and it will be seen as an embarrassing turnaround having cut interest rates just over 6 months ago.
If the RBA hikes, it will be the first major central bank in the world to raise interest rates in this cycle. Let’s hope that if the RBA hikes it’s a one and done. Whatever the RBA does the decision will be pivotal.
Let’s see!
Please Note – the thoughts and ideas expressed in this Bordez Commentary are my own and not with assistance from artificial intelligence (AI)
by Boris Sfiligoi
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