Flashnote: RBA lays the ground work for higher rates

Since last year, the RBA has been shifting from its disastrous 2024 forecast and slowly admitting it got its previous timing wrong. In recent months we’ve been seeing the door open for higher rates. In today’s statement, we’ve seen the foundation laid. We also have a sense of timing now, more on that below.

It's hard for the central bank to shy away from its global counterparts. There is a general consensus building around the world that inflation is not a short term problem and could blow out unless it is treated seriously. What we’re watching closely is the relationship between short and long term interest rates.

In the United States, 2 year rates are now higher than 10 year rates, which suggests that rates need to rise and they will slow down the economy. There will be speed bumps ahead, all in the hope of taming inflation.

Bottom line: The RBA has put a time frame on its next rate rise, saying “Over coming months, important additional evidence will be available to the Board on both inflation and the evolution of labour costs.” We interpret that to mean that rates will rise in the second half of this year. Perhaps June, July or August.

What we will also note however is that short term rates will significantly slow down global growth, barely recovering from the pandemic. So rate rises will bring pain, but the pain is difficult to sustain, so we don’t expect interest rates to go back to scary levels after rises this year. We’re going from ultra low to low and that’s a good thing.