OPINION: Central banks have yet to engineer anything remotely like the demand destruction, business failures and job losses needed to satisfy their price stability mandates.
. Our cash rate is only 4.1 per cent and priced to peak at a relatively benign 4.7 per cent. Yet markets project materially higher terminal cash rates in Canada , the United States , New Zealand , and Britain .
This has pushed the wage cost of businesses producing their services to unacceptably high levels, which is feeding a wage/price spiral that is evident in elevated services inflation.The problem, of course, is that this demand-side driver of inflation tends to be highly persistent and is propagating an iterative, multi-year battle to wrest it back down to earth.
One especially interesting canary in the coal mine that implies monetary policy is not nearly as restrictive as central banks believe is the global house price action. While Aussies like to think that our housing market is different, there has been a striking and globally coordinated bounce in house prices in Australia, the UK, US, Canada and New Zealand since the end of 2022.
So hopes for rate cuts in 2023 have been dashed and terminal cash rates keep getting repeatedly revised upwards, which equities have until very recently ignored. Given the unprecedented nature of the fiscal and monetary policy stimulus unleashed during the pandemic, the truth is that nobody really knows where the final cash rates will land – they will be determined by the data on jobs, wages, and inflation.
This is why the likes of Australian Super, which manages over $275 billion, and many other large institutional investors are shifting their asset allocation back into fixed income having been underweight bonds for decades.
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