/ 08 May 2024

Tempering expectations


The Squiz 

The Reserve Bank of Australia (RBA) yesterday opted to leave the cash rate on hold at 4.35%, quashing any predictions of a shift. But the real takeaway is that it’s lifted its short-term forecast for inflation – which is currently at 3.6% after several months of slowly dropping towards the bank’s 2-3% target range. The board says that means “the path of interest rates that will best ensure that inflation returns to target … remains uncertain and the board is not ruling anything in or out”. Which loosely means we could see more rate hikes…

But what about rate cuts…?

That’s a fair question, given there’s been plenty of speculation from economists in recent months that rates could start to drop in the second half of this year. But you know what they say about best-laid plans… The problem, which the Reserve Bank flagged yesterday, is that it’s becoming increasingly clear that high inflation is dragging on for longer than first thought. Reports say that’s largely down to soaring petrol prices and Oz’s healthy employment figures – but the high costs of other essentials, like rent and electricity, are also contributing. That’s not to mention the effects of global wars, overseas inflation, and trade issues… All that has RBA Governor Michele Bullock warning the final push to return inflation to target “will likely continue to be bumpy, and we should all be prepared for that”.

Anything else? 

Well, we could hardly talk about interest rates without mentioning next week’s Federal Budget… Reports say the Reserve Bank’s decision yesterday could put an end to the cash splash some were expecting from the Albanese Government. But Treasurer Jim Chalmers was careful to point to the positives yesterday – he said Australia’s net debt will come in $152 billion lower than forecast. He also flagged that we’ll see increases in welfare payments as part of the Government’s cost-of-living relief measures. And while we’re talking budgets, Victorian Treasurer Tim Pallas delivered his 10th for the state yesterday… The top line is that several major projects – including Melbourne’s long-awaited airport train – have been delayed as the Government looks to keep a lid on spending. A common theme, it seems…

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