The RBA increased rates by 25 basis points. It should have been 40 points. We then should havetwo more rates rises of 50 points. This means the official cash rate would be 1.5% which is what the CBA says is the neutral rate. The RBA can leave the rate there for 6-9 months and see what happens. I suspect they will have to keep raising rates but I could be wrong. how the RBA could previously say rates would rise until 2024 was beyond me. that was beyond stupid. Few people can forecast well!
Also important here is that despite being at full employment there has been NO improvement in the structural deficit. I suspect the ALP is winding up to ape Tony Abbott if they win and say the cupboard is bare. Like Abbott they will be lying as we have PEFO which says otherwise.
Overall not good at all
I am a little vexed on interest rates, and how hard and fast the RBA should move. I can argue it either way. First, the evidence so far is that the Australian sources of inflation are largely external (war in Ukraine (resulting in anticipated supply constraints), COVID lockdowns in China (actual supply constraints), excessive stimulus in the US (heightened world demand from the US)). Albeit it doesn’t take much to spark a local wage price spiral, and there are some local factors (such as growth in household savings, and reduced immigration) that could be driving inflation. Second, we have a lot of architecture now for fighting inflation (compared with the 1970s): floating the dollar, decentralised wage fixing, and a quasi-independent central bank with an inflation target and Taylor’s rule that informs the setting of interest rates. Third, interest rate increases are a blunt instrument, and can easily give rise to a lot of collateral damage. Soft landings are notoriously hard to pull off, and recessions are the result of RBA policy overshoot.
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