Time for RBA to slow down to execute a soft landing

The RBA has acted forcefully to get monetary policy back to a more normal setting with back-to-back 50 basis point hikes following the initial 25bp increase in May. The cash rate has increasedIt is entirely appropriate and will do much to reduce the medium-term inflation risks Australia is confronting.

Our home-grown inflation threat is being generated by the labour market where the aggregate demand from labour is rocketing miles above the underlining supply of new workers entering the economy.Just about every indicator of labour demand is at record highs. Job vacancies are going vertical, rising at more than a 50 per cent annualised pace over the three months to May.

Wage growth is rising and not just because of the decree of the Fair Work Commission. Labour turnover as measured by the number of people changing jobs in the last year experienced its largest rise in four decades over the year to February 2022. There is evidence that suggests it is the change in labour turnover that matters for wages, rather than the outright rate of turnover.to play in bringing the demand for labour into line with supply. This is no precision exercise.

The impact of the RBA’s interest rate policy on the economy can be judged by both the level of interest rates and taking into consideration the effects of changes in the nominal cash rate on cashflows across the economy. Raising interest rates, even when they are well below neutral, has a short-term contractionary effect on the economy.

The short-term neutral cash rate is difficult to observe and will change in a relatively short time-frame.This is why the RBA needs to slow down the pace of tightening over the second half of the year. They need to see how the change in the cash rate impacts people’s behaviour and market outcomes. My expectation is that they will have no choice but to respond to a large Q2 CPI in early August with a 25bp hike or even a 40bp increase. .

Wut? It needs to speed up…it’s the last and slowest.

What about already problematic goods and services inflation? Have you been listening to the Dutch, the Italians, the Polish and the Canadian farmers?!

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