The RBA should warn that it could raise rates again
High inflation reinforces that the RBA should have raised rates by more last year, in line with its peers.
High inflation and a still-tight labour market should see the RBA backtrack on policy and resume warning that it could rate rates again, something that CCI’s analysis has long suggested they should have delivered on last year.
Strong inflation at the start of this year places the RBA in a very uncomfortable bind when it meets next month to revise its outlook and decide on interest rates.
The RBA had recently turned neutral on interest rates, emphasising that it was “not ruling anything in or out”, but now seems likely to backtrack and warn again that the next move in interest rates could be up, with the governor likely regretting that her predecessor did not follow the RBA’s peers and raise rates more last year.
Echoing the experience of several other countries, underlying inflation accelerated in Q1 and is tracking well above the RBA’s forecast profile, with the trimmed mean CPI rising by 1% in Q1 and with the trajectory of the monthly CPI suggesting that it could plausibly increase by 0.9% or more in Q2.
At the same time, the labour market still remains tight in that unemployment of 3¾%, while off its multidecade low of 3½%, remains below the RBA’s 4½% estimate of full employment.
These developments should force RBA staff to revise up near-term forecasts for inflation and employment and temper the expected increase in unemployment when the bank’s outlook is updated in the Statement on Monetary Policy, due the same day as the 7 May interest rate decision.
Higher inflation and a still-tight labour market should trigger an active discussion among board members about whether they need to raise rates further, particularly when there is a risk that it takes longer to return inflation to the newly-mandated midpoint target of 2½%.
Board members would also be disappointed by the mix of inflation, where CCI's experimental measure split of the trimmed mean CPI points to a rapid acceleration in already-high core services inflation, with slow growth in core goods prices contrasting with the flat-to-down moves seen in other countries.
CCI’s policy rule analysis has long suggested that the RBA should have followed its peers and raised rates to about 5%, but the RBA purposefully decided to raise rates by less than its own outlook would imply in order to limit the damage to unemployment.
Some policy-makers might continue to run that line given weak economic growth, but that view should be challenged by July’s income tax cuts, which are worth $21bn for the financial year as a whole, equating to about ¾% of GDP.
The RBA believes that the rejigging of these cuts towards low- and middle-income taxpayers will not have much effect on the outlook, but there is the clear risk that cash-constrained households spend the money at a time when rising house prices are driving wealth higher and real incomes are past their low point.
Never miss an update
Enjoy this wire? Hit the ‘like’ button to let us know.
Stay up to date with my current content by
following me below and you’ll be notified every time I post a wire
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.
........
Investment Disclaimer
Past performance does not assure future returns. All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This information has been prepared by Coolabah Capital Investments Pty Ltd (ACN 153 327 872). It is general information only and is not intended to provide you with financial advice. You should not rely on any information herein in making any investment decisions. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. The Product Disclosure Statement (PDS) for the funds should be considered before deciding whether to acquire or hold units in it. A PDS for these products can be obtained by visiting www.coolabahcapital.com. Neither Coolabah Capital Investments Pty Ltd, Equity Trustees Ltd (ACN 004 031 298) nor their respective shareholders, directors and associated businesses assume any liability to investors in connection with any investment in the funds, or guarantees the performance of any obligations to investors, the performance of the funds or any particular rate of return. The repayment of capital is not guaranteed. Investments in the funds are not deposits or liabilities of any of the above-mentioned parties, nor of any Authorised Deposit-taking Institution. The funds are subject to investment risks, which could include delays in repayment and/or loss of income and capital invested. Past performance is not an indicator of nor assures any future returns or risks. Coolabah Capital Investments (Retail) Pty Limited (CCIR) (ACN 153 555 867) is an authorised representative (#000414337) of Coolabah Capital Institutional Investments Pty Ltd (CCII) (AFSL 482238). Both CCIR and CCII are wholly owned subsidiaries of Coolabah Capital Investments Pty Ltd. Equity Trustees Ltd (AFSL 240975) is the Responsible Entity for these funds. Equity Trustees Ltd is a subsidiary of EQT Holdings Limited (ACN 607 797 615), a publicly listed company on the Australian Securities Exchange (ASX: EQT).
Forward-Looking Disclaimer
This presentation contains some forward-looking information. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual performance and financial results in future periods to differ materially from any projections of future performance or result expressed or implied by such forward-looking statements. Although forward-looking statements contained in this presentation are based upon what Coolabah Capital Investments Pty Ltd believes are reasonable assumptions, there can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Coolabah Capital Investments Pty Ltd undertakes no obligation to update forward-looking statements if circumstances or management’s estimates or opinions should change except as required by applicable securities laws. The reader is cautioned not to place undue reliance on forward-looking statements.
4 topics
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,...
Comments
Comments
Sign In or Join Free to comment
most popular
Equities
The 7 zombie companies lurking on the ASX 300
Livewire Markets
Education
Warren Buffett’s 25 biggest mistakes – and 4 lessons they teach
Leithner & Company Ltd