The Reserve Bank of Australia, today increased its official cash rate by 25 points to 2.60%.
This is still a very stimulatory level and therefore current monetary policy will continue to fuel inflation.
Nonetheless, the Reserve Bank appears to have done the right thing.
It would appear, they have begun to listen to economists such as myself who have been highlighting that they began raising rates far too late to head off inflation. And in doing so, hiking now only added to the considerable pressures consumers and businesses are already under, via high food and energy prices and broad-based inflation that is supply, not demand-driven.
The RBA should have been raising rates gently a year ago to take the edge off the clearly approaching global inflation tsunami.
But, to be mindful this inflation wave is largely the product of supply disruption, re-direction, and actual shortages, rather than purely a function of a booming economy as previous inflation waves had predominantly been. As such, the aggressive raising of interest rates, as the Federal Reserve is doing, was a mistaken response to the current economic crisis.
Crisis it is.
That someone is ‘at home’ at RBA headquarters in Martin Place, is a welcome surprise.
It is unlikely, however, that the RBA will stop raising rates entirely. These are still highly stimulatory levels, and we should expect the RBA to be settled for the moment into a fresh series of 25-point episodes at each forthcoming meeting.
The most likely eventual destination still remaining as high as 3.25%. As it is unlikely inflation will drop away quickly enough for the RBA to entirely remove its foot from the break.
For financial markets, this is a great relief to the stock market, but does condemn the Australian dollar to ever lower levels.
We had forecast 65 cents for The Australian dollar this year. Target achieved. We also highlighted there was further risk to as low as 58 cents over the coming year.
It’s nice to see some actual thinking at the RBA, for a change.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
