Yahoo Finance Rate hikes must end as inflation free-fall continues
Despite inflation obviously easing, the RBA has somehow judged it necessary to keep hiking interest rates in recent months.
Good news. Inflation is continuing to fall. And, with that, the pressure for further interest rate hikes is fading fast.
Indeed, it is increasingly clear the Reserve Bank (RBA) has over-egged the rate-hiking cycle with its unrelenting tightening of monetary policy in the past few months.
In the year to May, the Consumer Price Index (CPI) rose 5.6 per cent, down from 6.8 per cent in the year to April and the peak of 8.4 per cent in the year to December 2022.
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The slower economy, the effect of aggressive interest rate hikes from the RBA, global pressures and still-moderate wage increases are all acting to see inflation drop by 2.8 percentage points in just five months.
While inflation is still some way from being entrenched in the RBA’s 2-3 per cent target range - something the revamped bank will adhere to when the new board is appointed shortly - the momentum in the economy and other drivers of inflation suggest the return to target is in sight.
Indeed, it could be soon.
It is important to note that these inflation data do not include the full effects of the interest rate hikes in the pipeline, which should give comfort for those looking for inflation to fall rapidly to acceptable levels. Lower inflation is baked into the year ahead.
For the RBA, its forecasts in its May Statement on Monetary Policy were for inflation to ease to 6.3 per cent in the year to the June quarter – those comprehensive inflation data are scheduled for release in late July, just ahead of the August meeting of the RBA board.
On the latest figures from the monthly CPI and broader trends in the economy, the risks favour inflation undershooting this forecast and, indeed, this should continue with its inflation forecasts into the second half of 2023 and into 2024.
That would be further good news and would point to the RBA having a too-pessimistic view on the time it will take for inflation to return to its target range.
There are other issues pointing to inflation easing at a rapid rate.
The 5.6 per cent annual increase in inflation to May 2023 includes some of the chunky increases in prices in the second half of 2022. With each monthly update from now, these will drop out of the annual ‘run-rate’ and, if the new data is even a little lower than the figure they replace, annual inflation will continue to fall.
Related to that, in the five months on data since the end of 2023, inflation has been 1.2 per cent, or 0.24 per cent per month. At an annualised pace, this points to inflation running below 3 per cent in the first half of 2023.
This is good news and begs the question: with inflation obviously easing, why has the RBA judged it necessary to hike interest rates in recent months?
Is it yet another forecasting error? Another misreading of the risks of a wage-price ‘spiral’? A concern that house prices, which are outside the domain of the RBA, have been edging up in recent months?
It is not at all clear, particularly when account is taken of the broader weakness in the economy, especially consumer spending and dwelling construction.
The RBA has made a mistake hiking interest rates as aggressively as it has. Inflation was falling with the hikes delivered in 2022. The 2023 hikes are overkill.
The result of this error will be an unwelcome and unnecessary rise in the number of people unemployed, which could run to 140,000 when the damage is done.
The RBA board meets next week and, while it’s been remarkably difficult to judge the personal choices and behaviours of the board members with their decisions to hike rates, there is no sensible case for further interest rate rises. In fact, the inflation momentum is likely to spark talk of rate cuts before the end of the year.
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