The big data points of the past week or so have confirmed the following economic facts.
The annual increase in underlying inflation is tracking at 1.8 per cent, locking in seven quarters where the inflation rate has been outside the RBA target range, and the unemployment rate remains high, at 5.6 per cent, which will inevitably lock in low inflaiton in future,
These two issues alone would suggest the need for monetary policy easing from the RBA. If the economic checklist is expanded to include below trend GDP growth, a surging Australian dollar and respective, but not great, performance from the global economy and the rate cut would be a slam dunk. Alas, the RBA is worried about financial stability, house prices in Sydney and Melbourne and is supremely confident about the outlook for the economy into 2018.
This means the RBA is not going to cut interest rates any time soon, even though a more progressive RBA would.
The economy is at an inflection point and which was it goes over the next six months will determine whether the next move in official interest rates is up or down. For the hike scenrio to move to centre stage, the following events must unfold.
GDP growth needs to be confirmed on a path to 3 per cent; underlying inflation needs at least two consecutive readings at 0.7 per cent or more, wages growth needs to pick up towards 3 per cent and the unemployment rate needs to track towards 5 per cent or less.
I am not aware any forecasting making these calls, yet they are calling interest rate hikes.
Strange days indeed.
