No pivot...yet
An excellent speech and Q&A from Governor Lowe today, well delivered, and occasionally in the face of some daft questions (albeit not from the students, though!).
You only have to look back to what all of the major banks and economists were forecasting a year ago to see how quickly the global inflation landscape changed, but apparently every central bank observer is now an expert in hindsight.
I guess it's a thankless job to be a central banker at the best of times, and this sort of thing goes with the territory...but still.
Anyway, as Lowe pointed out inflation expectations remain firmly - actually very firmly! - anchored in Australia.
The supply side of the global economy is gradually improving, and the demand for goods is stabilising.
Probably the most interesting part of the event was a question about whether rate hikes in, say, Canada or the Eurozone (where the key ECB interest rate was actually negative until very recently) need to be matched by equivalent hikes Australia.
No, said Lowe, partly because while some countries (e.g. United States) already have very strong and accelerating wages growth, in Australia the wage price index has grown at a whopping 2.7 per cent over the past year.
Wages growth in Australia should pick up from here, but probably not to such high levels.
This loosely suggests that the path forward for monetary policy might be, say, a 25 basis points hikes in October, and perhaps the same again in November, before a possible pause at a cash rate target of 2.85 per cent.
By the time the RBA reconvenes in February everyone will most likely be back to blethering on about recession risks again (let's timestamp that).
Demand cooling
On the demand side, the tighter policy delivered to date is beginning to work.
Because I work in real estate, I get to see some of the sentiment shifts in real time, and there's definitely been a drop off in demand in recent weeks and months (not just for buying property, but also for renovation, construction plans, new home sales, home furnishings, and the like).
It's just starting to show up in some data series too, if you look closely - the eagle eyes of (I think) Justin Fabo at Macquarie Macro identifies how new SEEK job ads have been falling for three months in a row now, just in time for the migrant tsunami.
There was the usual 'spirited' debate about whether or not the apparently dovish speech represented a pivot of sorts.
Stocks and bond markets thought...yes, to some extent.
Source: Bloomberg
A lot can happen in a couple of months, so let's hope that inflation peaks at a lower level than forecast and begins to ease again.
In short, as the cash rate rises the case for a slower pace of hikes becomes stronger.
