The central bank’s hawkish pivot has no credibility given it is not willing to do the bare minimum and raise interest rates in line with global peers.
Perhaps the single most important driver of the market volatility of late has been investors junking the soft-landing narrative and embracing the idea that we might suffer a hard-landing.This column has repeatedly argued that hard-landings are likely going to be required to tame global inflation, and that estimating the little-known “Sahm Rule” affords powerful insights into advent of these contractions in real-time.
You cannot land if the Fed has not hit its inflation target. Over the last six months, US core inflation has been running at 3.1 per cent, more than 50 per cent higher than the Fed’s target . The harsh reality is that the RBA is meant to dispassionately take account of all of this. And yet its reluctance to do its job and set the cash rate at the 5 per cent level that its own internal models and analysts recommend – for fear of upsetting the current government – has precipitated the mother-of-all credibility crises.
Based on the new RBA forecasts unveiled this week, it does not expect to return core inflation to 2.5 per cent until 2027. This is because the RBA has been compelled to once again concede that “the labour market and broader economy are tighter than previously thought” and that its “model estimates of the gaps between demand and supply in the economy are larger than we had previously assessed”.
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