RBA: Policy not as tight as peers, which is why inflation is higher
The RBA has highlighted how policy is less tight than other countries, such that inflation is higher than in nearly all its peers.
With the year almost over, this afternoon the RBA kept the cash rate steady at 4.35%, having last raised rates twelve months ago.
The RBA also issued an updated outlook that was little changed from August, showing a slow return of underlying inflation to the 2½% midpoint of the inflation target in late 2026.
The slow return of inflation to target reflects the well-known choice by the RBA not to raise rates as much as other countries in order to preserve as many of the COVID-era gains in the labour market as possible.
Interestingly, the RBA was more explicit in highlighting this trade-off in two charts in today's Statement on Monetary Policy.
The first chart shows how Australia's monetary policy - as measured by the policy rate less the neutral rate - is not as tight as other countries, even with some other central banks already cutting rates.
The second chart shows that less tight policy has meant that underlying inflation in Australia is higher than nearly all its peers, where lower inflation elsewhere has allowed other advanced economies to start cutting rates sooner.
CCI has previously made the same points, such that the RBA has less scope to cut rates than other countries if it achieves a soft economic landing for the simple fact that it never raised rates by as much as in the first place.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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