The prospect of “higher for longer” interest rates is raising questions about whether the Reserve Bank’s less aggressive inflation fight can last.
The last mile of the inflation fight will be the toughest test for new Reserve Bank of Australia governor Michele Bullock.
The RBA is targeting a return to its 2-3 per cent inflation target by late 2025, later than most other comparable central banks. “They’re taking a very long runway to get inflation back to target and have left no room for upside surprises,” Auld says. “The main reason for that is the RBA interest rate is a lot lower than most other countries, so the market believes the hurdle for the RBA to eventually cut is going to be a lot higher.”
Fed watchers are also contemplating that the so-called neutral interest rate – where monetary policy is neither expansionary nor restrictive – could be higher than the estimated 2.5 per cent nominal rate. That hawkish belief is because the Fed has already imposed more than 5 percentage point of rate rises, but the US economy continues to motor on.
Alexis Gray, senior economist at Vanguard Investments, expects the RBA to be forced to lift the cash rate. ANZ’s Croy says to some extent Australia can ride on the coat tails of other central banks tightening interest rates, which will flow through to the world economy and Australia. “The tightening being delivered by other central banks around the world will filter down to Australia and make the RBA’s job a little bit easier.”
Kieran Davies at Coolabah Capital suggests analysts are focusing too much on the household cash flow channel. JBWere’s Auld says that there may be reasons to think Australia is a bit different to overseas. The huge US budget deficit is more stimulatory and inflation is more acute in the UK. But ultimately, she doesn’t think Australia will be all that much different. She remains wary about the potential for wages breaking out and fuelling persistent inflation in Australia.
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