ECONOMIC INSIGHTS COULD THE RBA ACHIEVE A GOLDILOCKS OUTCOME
Inflation has and is still rising decisively across the world . Central banks are responding by removing their accommodative conditions introduced in response to the Covid outbreak in 2020 . The RBA provided ultra-cheap funding to every ADI ( Approved Deposit Taking Institution ) in Australia and bought debt securities in the wholesale market to provide stability in the financial system , to ensure lending conditions were attractive for all . Many economists , former PM ’ s & Treasurer ’ s , former senior & current strategists in chorus have said “ too much for too long ”.
With inflation raging the first of a series of cash rate hikes will most likely occur in the June Quarter and follow in steady succession into 2023 . This , very much sooner than RBA Governor Lowe ’ s initial posturing around Covid for ultra-low cash rates to 2024 .
A flood of historically attractive fixed rate borrowing by both households and corporations , small & large , partly matching the RBA ’ s cheap lending resulted through 2020 to 2021 . The punchbowl is being removed finally , well ahead of when this debt matures between 2023 and 2025 .
These borrowers will receive ‘ rate shock ’ when it comes time to renew their loans . Senior trading bank officials are already talking , including to Burrell , about this wave and that it may turn into a cliff for some of those borrowers .
The question begs can the RBA raise the cash rate higher and massage the rise in credit margins without a recession or ‘ recession like ’ conditions and / or a sizeable rise in insolvencies . In addition , avoiding a rapid un-wind of out-sized increases in prices since Covid ’ s on-set for nearly all property types ; residential , industrial , commercial , mining and rural in metropolitan and the regions .
History shows , Fig 1 below by Capital Economics , is not on the side of central banks in general and may not be on the RBA ’ s side .
Overlaid in the mix , is a possible change of government , near record low unemployment and high current export revenues from elevated prices and volumes at the farm gate and mineral exports .
A goldilocks (#) outcome could include maintenance of high employment , maintenance of economic growth , a step down in inflationary pressures on households and businesses large and small , and a firm but not overly high Australian dollar .
It ’ s too early to reliably forecast , however we know savings have been higher worldwide so most households have funds to spend and to absorb rises in borrowing rates , and many still are rightly unsure of overseas travel , so holidaying at home again in 2022 and 2023 . If the RBA has some ‘ luck ’ with supply chain bottlenecks loosening up , commodity exports reducing only steadily and wage earners not being overly combative on wage increases , they may just achieve their Goldilocks .
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