Australia’s lucky economy | Article

The economy is slowing down, but gently

With this mixed backdrop, it’s no surprise that the RBA’s message was equally mixed. At its February meeting, the RBA suggested that inflation would not return to its target range until 2025. We believe this statement is intended to bolster the RBA’s inflation-fighting reputation, but it paints a picture far too pessimistic and, on the other hand, we see inflation approaching the target, even if it does not actually reach it, by the end of this year.

The March meeting delivered a very different message, with a minor text change interpreted to mean the RBA was within a 25 basis point hike in peak cash rates. This view seemed quite contested shortly after the meeting, as labor data painted a much more robust picture of the labor market, although the latest inflation data put this view back on the right way.

Minutes from the previous meeting confirmed that a pause was the RBA’s intention and that the financial turmoil that has rocked markets, along with a more subdued outlook for US rate hikes, means that a another rise may well be the right one for this cycle. And maybe not even that.

We revised our maximum cash rate up a few months ago to 4.10% after inflation spiked in December, but recent events have encouraged us to cut it by a 25bp hike to a peak of 3.85%, still low in absolute and relative terms.

So far, the impact of the RBA’s tightening will only be felt across the economy gradually, as the repricing of mortgages gradually adjusts to higher cash rates, further increasing the Debt servicing costs and cash balances boosted by the pandemic are reduced, leading to a moderation in consumer spending. Growth is expected to continue to slowly moderate and inflation to continue to trend lower over the coming months.

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