The Aussie economy is just too strong for its own good.
So RBA Governor Phil Lowe threw a bit of a spanner in the works last week.
The RBA hiked rates by another 25 bips on Tuesday. That was to be expected.
What wasn’t expected was how hawkish the Guv’na sounded.
Dashed were hopes that the RBA might be done. Dashed were hopes that we might only get one more and then be done.
It now looks like the Guv’na needs at least two more. At least.
“The board’s priority is to return inflation to target. High inflation makes life difficult for people and damages the functioning of the economy.”
“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later… further increases in interest rates will be needed in coming months”.
The problem for our Goldilocks Guv’na is that things are too hot.
Inflation is too hot.
That came in at a very eye-brow raising 6.9% trimmed mean over the year to December.
The RBA had been forecasting 6.5%, so that number made them look a little silly.
What’s worse, while goods inflation seems to be easing as supply-bottlenecks uncork themselves, services inflation just seems to be getting a run on.
Services inflation lifted from 3.1% in June to 5.5% in December. That’s a big jump.
What’s worse, the monthly Melbourne Institute Inflation measure came in off the hook in January.
The measure can be choppy, but right now it’s showing inflation at 09% in the month. Keep up that pace, and you’ve got annualised inflation of 9%!
So if the Guv’na is looking for signs of inflation cooling, there’s nothing we can really point too.
And not only is inflation running too hot for comfort, the economy seems to be doing much better than expected.
Domestically, unemployment remains at historic lows, and retail spending is holding up.
And overseas, the risks seem to be easing. China is reopening, the US is bully, and a mild European Winter dispelled fears of an energy crisis.
It’s so good that the IMF has revised up its forecasts for global growth in 2023 from 2.7% to 2.9%.
It’s all good stuff.
Unless you’re the Guv’na trying to get inflation under the boot before it gets out of control.
In that case it’s a headache.
And for us, it means that rates are probably going higher this cycle.
After the Guv’na’s hawkish turn last weeks, markets are now pricing in a peak cash rate of about 4 per cent by mid-year, from 3.35% today.
The CBA’s Gareth Aird lifted his terminal rate prediction to 3.85%. NAB’s Tapas Strickland is looking for 4.1%, while Morgan Stanley’s Michael Knox is looking for a terrifying 4.85%!
Ouch.
I don’t think we’ll get anywhere near that.
But, unfortunately, it does look like there’s a least two more in the barrel.
The Aussie Economy – just too strong for its own good.
JG.
James says
Would love your thoughts about this Jon ?
Seems unfair when one sector gets punished for every ones spending habits.
https://www.abc.net.au/news/2023-02-12/raising-interest-rates-reserve-and-bank-and-inflation-management/101952926