Wednesday 8 March 2023

Another monthly RBA meeting, another interest rate hike

The RBA decided to raise interest rates by another 0.25% on March 8. I had hoped (due to my vested interest in interest rates due to my mortgage) that declines in US inflation and energy prices (and some signs of inflation having 'peaked' in Australia) might make the RBA 'pause' for a month or two, rather than keeping hiking until the 'inflation dragon' is well and truly dead. A forlorn hope.

I can understand why the RBA wants to make sure inflation doesn't "get out of control" as the 1970s proved that once high inflation is built into employee expectations a cycle of wage rises (and the industrial action required to get them) can become entrenched. But higher household indebtedness levels probably make the Australian economy a lot more sensitive to relatively small interest rate rises than in previous decades, and there is little evidence of a break out in wage growth as yet (possibly due to much lower levels of union membership now compared to back in the 1970s, and legislative changes that have made many of the industrial actions that were used to pursue wage claims illegal).

What I don't understand is why the RBA has shown such a sustained reaction to inflation being above their 'target' range of 2%-3%, but showed practically no response at all for many years when inflation persisted to remain well below this target band.

There also seems to be a significant difference in how quickly the RBA will increase rates compared to have quickly it will lower them. Combined with the 'lag' of at least a quarter after a trend in CPI becomes evident before the RBA changes tack, and there seems a real risk that rates could be held "too high for too long" and push Australia into a recession.

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