RBA pauses rates again as inflation falls sharply

Posted by Gavin Chau

Once again it was comforting to see that the RBA made a sensible decision by opting to pause the rate hikes. This significantly increases the likelihood that we have reached the peak of the interest rate cycle. All the talk by mainstream commentators about “sticky services inflation” is largely just a bunch of people living in an echo chamber. There’s no such thing – the cycle usually just has a way of playing out sequentially. Put simply, commodities inflation leads goods inflation, and goods inflation leads services inflation. But of course, it’s professionally dangerous to take a contrarian view from your peers. If you’re wrong, then you’re on your own and look like a fool. So, it’s safer to stick with the pack.

The recent sharp decrease in the quarterly inflation figures from 7% to 6% was faster than the RBA’s expectation of 6.3%. It’s nice to see inflation continue to fall off a cliff. If we were to annualise the data over the last two quarters, we would see that inflation is already down to 3.2%. Within spitting distance of the RBA’s 2-3% target band. Additionally, there is little in the forward-looking data to suggest that more interest rate rises are required but of course, the more important question is what will happen rather than what should. If the RBA is sensible, it will realise that it has likely already done more than enough in the inflation fight.

Barring anything crazy happening, we will likely see rates stabilise here for about 4-6 months before dropping as the unemployment rate rises. The RBA will then come to the realisation they’ve gone too far and will scramble to cut. Michele Bullock, the new RBA chief will walk into the easiest start ever, being able to cut rates which will usher in roaring asset prices in a period of low inflation (at least as it’s officially measured by CPI). By the time the inflation beast flows out of asset prices and back into commodities prices, then goods prices, and we begin to see “sticky services inflation” articles begin appearing, we will enter this Groundhog Day of endless articles on this topic again! But this time I hope everyone still reading will be better informed and able to take steps to have profited from the knowledge of how these things play out.

Posted by Gavin Chau, on 1st Aug 2023