What does inflation peak mean for Australia?

Oksana Patron

6 March 2023

Although inflation in Australia has most likely peaked, the Reserve Bank of Australia (RBA) still needs to answer the question whether it would mean a plateau or a turning point, according to GSFM investment strategist Stephen Miller.

The manager compared this to the US Federal Reserve and the Bank of Canada which , albeit somewhat belatedly, aggressively hiked their policy rates in 2022, bringing them closer to some respite from inflation, compared to other developed market economies, including Australia.

“The pandemic saw monetary policy assume unprecedented levels of accommodation. Viewed through that lens, policy adjustments through 2022 may have represented a partial return to some version of normality and perhaps tighter conditions are yet required to meet the inflation challenge,” he explained.

“Drawing on the ‘70s experience, the least costly path in containing inflation in terms of potential dislocations in activity and employment, is to be aggressive early in the piece.”

According to Miller, the path between containing inflation and recession became narrower the longer central banks delayed aggressive action against inflation.

“The RBA’s prevarication through 2022 has meant that path has narrowed more than necessary,” he said.

“That means 2023 will be a year of slow growth – perhaps even a recession. That slowing growth was “baked in the cake” some time ago with the RBA’s tardiness in recognising the extent of the inflation challenge.

“But if the path between inflation containment and recession has grown even more narrow through 2022, a continued focus on inflation now might mean that the path is navigable and the extent of dislocation in growth and employment (both in terms of magnitude and duration) is minimised.”

Miller expected that like in February the RBA’s board would consider a 25 or 50 basis point hike and probably opt for the former.

“The RBA minutes of the February meeting released on 21 February indicated that that the RBA Board considered two options at that meeting: a 25 bp increase or a 50 bp increase, with the Board deciding there was a stronger argument for a 25 bp move. This indicates a high bar to a reversion to 50 bp increases,” he said.