Inflation - RBA response?

Inflation is starting to take off after all the perpetual money printing and supply chain/energy shortages.

U.S. PPI surged 8.6%. China's PPI is 10.7%. Economists who were saying it's transitory are now changing their tunes.

Australia has a lot of household debt, some of the highest in the world, and a wrong policy move would naturally be devastating. What is your thoughts on the RBA's response? Will they be ahead of the curve or behind the curve? We will start to see rates rise, like in New Zealand, in the next couple of months? Or will they be scared of the implication on household debt levels and hold off?

If they don't act in a timely manner and put interest rates up, inflation will become entrenched. It will mean much larger rate hikes later to get on top of this, not the ideal scenario for an economy with so much household debt.

 

A few central banks have hiked rates in response to inflation data already. However heading into election time gov will try to keep the music going as long as they can. IMO any rate rise will likely occur after elections are done, or if earlier only after FED has raised first before Christmas.

In any case end game is here soon, usually money printing = inflation/hyperinflation = raised rates
Which then causes economic slowdown and likely stagflation. A likely scenario in the USA. Here in Oz thing may be better as high commodities prices across the board are good for us

 

IMO inflation definitions will/are being changed, the response will be delayed but over done, that will be the trigger of the next Australian recesion. Timeframe unknown but it wont be seen in the short term.

 

I see no chance of RBA cash rate rises in the next few months. They better stop bond buying first!

and even if they said last month again that they don’t intend to raise it before 2024, I think they will do it sometime in 2023 but no chance in next 6 months.

 

If inflation stays where it currently is into the new year, 2022 will almost certainly bring rate rises. Perhaps not until back end but potentially even sooner by about mid year. No rise until 2024 is a pipe dream.

 

inflation is real. Central banks are arguing its "transitory" meaning pent up demand and supply chain bottlenecks causing temporary jump in price.. i disagree. Apple announced few days ago that they are cutting Iphone production because they cant source enough semi-conductors. the supply side price pressure will last.

EM CBs were first to hike interest rate to tame inflation as USD strength created havoc in those world..back to G10 the pendulum has swing back, RBNZ has hiked 25bp but another 2 successive 25bp hikes are "fully priced" by market with 60pct chance for April hike also ("OIS interest rate swap for April rbnz meeting" is trading at 1.15pct). Bank of england is also fully priced in to hike in Nov.or dec this year and list are growing... On friday MAS (singapore) tightened policy unexpectedly.

so what does it bold for Aussie. Financial market is signallying policy error, market is "fully pricing" a 25bp hike in Australia by next Nov, not this 2024 non-sense Lowe (RBA governor) is spinning out. on USA side, tapering will start in Nov and market is fully pricing a Sep 2022 25bp hike fot federal funds rate.

what i mean is, by the time ordinary Joe reada on this SMH or hears on Seven News that "rba hiked" thats well past the event.. financial market prices in monetary tightening well ahead of it actually happening. so be smart and dont wait for actual hike to happen.

those who dont believe me, try google "ois" swaps, or "1y1y forward swap rate" to see what i am referring to. Inflation has already shot up, financial market is saying "policy error" to all the central banks out there... so if you are buying a house now because you think interest rate stay low for next 3yrs you will be in for a rude surprise.

disclaimer: i trade short end interest rate for an investment bank, whiles i cant predict house price in 3mth i can say with confidence interest rate will go up much sooner than normal ppl think which has already been discounted by the markets, including those big4 banks

 

Thanks Carfield. I'm felling the same, I think the RBA will act too late and then have to play catch up, which could see interest rates go much higher than they needed to do.

 

The Reserve Bank is suppose to be independent. Do you think Josh Frydenberg will coerce the RBA to hold it's ultra-low policy setting? It wouldn't be very good financial management, but they do appear to govern for themselves and not in the best interest of Australian citizens.

 

A lot of the price rises are in PPI (Purchasing Price Index) and hence are yet to filter through the system. I suspect inflation will certainly rise into next year as these prices begin to turn up in finished goods. On top of this you have energy and transport costs.

 

When rba lowers rates to stimulate the economy it ignores the upward pressure on house prices .... not part of mandate blah blah blah. But when it needs to raise rates to contain inflation, then it hesitates due to downward pressure on house prices. Double standard?

 

RBA doesnt target house price. Their mandate is meeting medium term inflation target. They lowered interest rate because inflation was deemed to undershoot their target despite house price etc. during covid uncertianty. If inflation start to overshoot they are mandated to hike to keep the inflation under control.

US equivalent, federal reserves, have dual mandate of inflation target and maximum employment. RBA doesnt.

 

I think the other policy failure is the removal of house prices/land from the CPI. In the 1980's house prices were included in the CPI - it makes sense, they make up a significant portion of ones living expense. However, they were removed from the CPI and replaced with an Owners' equivalent rent/imputed rent.

As Carfield comments, the RBA targets inflation. With the feedback loop now broken, house prices have been allowed to surge, and interest rates are much, much lower than they should actually be. This now has an impact in financial stability when inflation bears it's head and rates have to rise.

 

The Bank is a body corporate wholly owned by the Commonwealth of Australia.

And yes they are 'supposed' to be independent.

 

+1 re land and cpi. But I think you and carfield miss my point. The rba is not supposed to care about house prices, but it seems to when rate rises would derpress the market (but not when reductions would turbo charge it).

 

strongest CPI print in NZ this morning (20yr high)

aud yield spiked and financial market pricing a 25bp hike by Aug-Sep in 22 now.

 

3 Year Aussie Bond gaining strong momentum and currently at 0.770

 

Inflation? haHA. yeh right. Chinese bust = deflation. Negative rates, more QE.

DO NOT BE FOOLED BY THE NARRATIVE.

 

covid cases spiked to a new 3m- high in UK. Russia most deaths on record past 24 hours. Two new strains being investigated. DO NOT BELIEVE for a second rates will move.

 

I can't wait for negative rates on my home loan.
Bank will pay me to take a mortgage out.
We don't have to be jealous of those Danish anymore.
Danish bank launches world’s first negative interest rate mortgage

 

Really want to see the loan amortisation table for those.

assume you have to pay off the loan in 25 years. Wouldnt that mean you need to pay 4% a year principal?