RBA Assessment: Further Hikes

This week saw the RBA hold rates steady. as was forecast here.

But, is it a mistake, like the Fed’s slowing?

The US Federal Reserve had a split decision whether to continue hiking at 50 point increments, or to drop the pace to 25 points. The end of tightening was nowhere in sight, but like the RBA, the Fed was concerned about the still to flow through full impact of previous rate hikes. They chose to slow.

Not long after changing gears lower, Chairman Powell was soon warning that re-accelerating inflation could well cause a return to 50 point hikes. This plan was only scuttled by the banking crisis, but is again being re-kindled by the risk of rising, again, Oil prices. Which could quickly flow through to all aspects of the US economy.

This is likely the exact scenario the Reserve Bank of Australia is likely to follow. Having to re-accelerate rate hikes in line with still strong and potentially quickening energy driven inflation wave.

The view here, is that the economy both in the US and increasingly in Australia is already slowing significantly. This is due to the extreme inflation itself beginning to impact consumers and businesses alike. 

We must not forget that the RBA has been a big factor in triggering massive inflation and now an economy falling in a whole. We forecast both the post-Covid boom and how rates near zero during this period would lead to an economic valley and high inflation on the otherwise of that boom, in real time. This was when everyone else was bizarrely extrapolating the post-Covid boom to last forever? How wrong were they.

Now, as bank economists and the RBA play catch up to the stark reality confronting us all. Further mistakes of applying old world style inflation fighting by the RBA, are now being made.

When one forecasts RBA rate policy, and this has been the case for many years, it has rarely if ever been about what is the right thing to do, but what will the RBA do? For it operates in a parallel universe, and these are two very different things.

With Governor Lowe always overly determined to pursue his namesake, until it is too late, this pause in rate hikes could again be in error.

What most people are failing to appreciate is that current rate settings in this country remain stimulatory in nature. If the RBA decides it can and must win the fight against inflation again, especially if oil and energy prices again begin to rise, then it must resume rate hikes with a vengeance.

The great hope here, is that the recent surge in oil prices reverses? This is more a hope than a probability. Therefore, inflation in Australia, regardless of the slowing economy has the potential to re-accelerate.

The Fed would be well aware of this. When the RBA finally catches on, it will again be playing catch up to its own misguided belief that it still needs to hike to fight inflation.

This can only result in an even deeper recession than the one we have been forecasting all along.

The warning signs are everywhere in the economy now. The RBA has perhaps really paused for 1-2 meetings so as to regain some popularity? For why, if you think you will still be raising rates, as clearly stated, would you pause? Such action will only elongate whole the cycle and maintain broad consumer and business uncertainly.

The RBA is not smart enough to understand what is really going on in the economy until it is self evident and has already happened in the rear view window. That is what being data obsessed means. No imagination. Just being able to justify actions as a modus operandi.

Australia deserves far better. And when Governors were appointed from outside the bank, in the past, then we did have far better.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

All commentary is on the record and may be quoted without further permission required from ACY Securities or Clifford Bennett.

This content may have been written by a third party. ACY makes no representation or warranty and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any third-party. This content is information only, and does not constitute financial, investment or other advice on which you can rely.