RBA Start Stop Policy Could it be Over?

RBA Leaves Rates Unchanged at 4.10%.

Is there hope?

The Reserve Bank of Australia has been remiss in missing the inflation tsunami in the first place, and then far too aggressively hiking rates subsequently.

We have argued that this is a different kind of inflation. Arguably, driven more by increased government spending and the need to increase prices to widen profit margins due to higher uncertainties generated by both the pandemic and the Ukraine conflict.

We would like to emphasise the lasting aspects of inflation are increasingly related to those wider profit margins and to accelerating wage pressures.

This is why I have been highlighting that the adoption of last century central bank playbooks which worked against over-heating economies, are inappropriate in the current circumstances.

The RBA should immediately halt all tightening policy. As in the current situation it will only create an even deeper recession risk, while this form of inflation will in fact be self-defeating from this point. That is, inflation will stabilise, then moderate naturally from here. Without any further tightening of monetary policy.

The Governor’s statement today, as rate were left on hold, read more like a public relations exercise than anything else. Is the Governor getting help writing his speeches these days?

That aside, the hold on rates, at least for the moment is a welcome development. The best course of action from here is to do no more harm.

There is a risk however, as the upcoming quarterly inflation data has the potential to again trigger a Reserve Bank which does not seem to understand the true nature of contemporary inflation, into yet further rate hikes.

The RBA should not hike rates any further, but that has never stopped them before.

For markets, the relief rally in equities could be short lived as the growing risk of recession is increasingly recognised, and the RBA may well continue to blunder.

For the Australian dollar, the possible loss of as strong a support from interest rate settings as was hoped, may leave the currency badly exposed to a severely slowing global economy.

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.

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