And we shouldn’t be so naive as to think the two simply cancel out. Indeed, pushed to the limit, either the brakes burn out or the engine explodes.
When the RBA board next meets, I believe there’s a better-than-even chance it will raise rates for the first time in nine months to 4.6 per cent, the highest level in nearly 13 years. And it may not be the last time.
Over the next 18 months, the RBA raised rates by 4.25 percentage points, the most rapid tightening cycle of the modern era. Meanwhile, core inflation peaked at 7.3 per cent in December 2022 and has since fallen to 4.1 per cent.This takes us to the first driver. We have seen enough by now to know the RBA simply hasn’t done enough to bring inflation to heel. Early on, inflation fell rapidly as supply constraints eased, but they have left sticky demand-driven inflation in their wake.
On the first claim, there is no credible evidence of interest rates transmitting more directly in Australia than in other countries. This was simply speculation. On the second claim: managing high inflation is a bit like managing substance abuse – perhaps you can get away with it for a little while, but it is a dangerous game that invariably ends in disaster. Full sobriety is the only surefire remedy.The data is crystal clear that the process of disinflation stalled at the end of last year.
While the RBA is trying – too gently – to ease its foot onto the brake, Australia’s governments are pushing on the accelerator. This leaves the RBA little choice but to stamp down harder lest we hit the wall.And we shouldn’t be so naive as to think the two simply cancel out. Indeed, pushed to the limit, either the brakes burn out, or the engine explodes. I have no doubt we would have been in a better place as a nation had both sides simply been more restrained.
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