Australia’s cash rate might be a whopping 3.5 percentage points higher than a year ago, but the real short-term interest rate is mired near historic lows.
The broader commentary is focusing on the large change in the cash rate over the past 12 months as determining a restrictive stance for Australia’s monetary policy. But economists should be highlighting the critical importance of the level of the real short-term interest rate in determining the appropriate monetary policy setting.Louie Douvis
Australia’s cash rate might be a whopping 3.5 percentage points higher than a year ago, but the real short-term interest rate remains mired near historically low levels.The RBA board has a diabolically difficult task in trying to make judgments about the appropriate setting for Australia’s interest rate. But that judgment must be informed through an assessment of both the nominal change in interest rates and the level of the real interest rate.
For our dollar-bloc peers, real rates on this measure have only just exceeded zero in recent months, with an average real policy interest rate of 0.7 per cent. They all have positive real rates. Australia continues to be the standout with our policy rate of 3.6 per cent matched to a forecast core inflation rate of 4.3 per cent in 2023. Our real interest rate is 1.4 percentage points below the average of our peers, and it is still negative at -0.7 per cent.I agree that the RBA board should be tightening at a slower pace than other central banks because of the prevalence of variable-rate lending in our economy. But it still must get there.
It makes no sense to me that the market and many market economists believe that we are at the peak cash rate. It makes no sense to me that the market and many market economists believe that we are at the peak cash rate. I don’t think this expectation is at all helpful for the RBA in trying to achieve its policy objectives. The turnaround in property markets highlights this point.
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