ANALYSIS: There may be a pause in rates rises, but the RBA cannot fall too far behind the interest rate curve of other central banks.
The moderation of headline inflation to 5.6 per cent this week and hopes that it could lead to a halt in interest rate rises may end up being a false dawn for Australians., the evidence is that interest rates are too low to bring inflation back to the 2 per cent to 3 per cent target band in a credible timeframe.
Second, monetary policy is only slightly restrictive compared to previous RBA tightening cycles, based on the estimatedThird, the RBA’s cash rate is materially below policy rates imposed by other Anglosphere central banks, which are battling upside inflation surprises. To be sure, monetary policy operates with long lags and the full effect of higher borrowing costs are yet to be felt. About 1.3 million fixed rate loans will switch over to higher variable mortgage rates this year and in 2024.
Outlook Economics director Peter Downes says mortgage borrowers have arguably been the “winners”, particularly as their wages increase in response to the rising cost of goods and services. Analysis by Coolabah Capital chief macro strategist Kieran Davies shows that the current cash rate is materially below past monetary tightening cycles. His conclusion is derived from estimates of the neutral policy rate - the cash rate at which monetary policy is neither stimulatory, nor contractionary.
In past rate hike cycles to tame inflation, the cash rate peaked at 0.6 of a percentage point above neutral in 2009 to 2010, 2.3 percentage points above neutral in 2002 to 2008 and 1.3 percentage points above neutral in 1999 to 2000.
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