Franzen Tips #1154-It’s Still Not Time to Celebrate, But It Is Looking More Promising

It’s Still Not Time to Celebrate, But It Is Looking More Promising

 

There was a communal sigh of relief as once again the majority of “so-called analysts” were wrong and the reserve bank (RBA) decided to leave interest rates on hold (I wonder how many of these analysts get to keep their jobs?).

 

Managing the Australian economy is a real tightrope affair and the big problem the reserve bank has is the lead time it takes for decisions to take full effect. As many people would realise, the RBA is trying to reduce inflation back from around 7% into the magic 2-3% range. However, most “analysts,” say that it is approximately 6 months after a rate decision that the full impact is realised. So, if the reserve bank continues to push too hard on rate increases, they run the serious risk of driving the country into recession in 6 months' time.

 

So, what is happening with inflation? Well, it's coming down but no one is quite sure if that is happening quickly enough, so on this occasion the RBA has decided to pause its rate increase program, for this month at least so they can reassess next month after new data becomes available to them. This week the AMP published their prediction of what is happening with inflation based on many factors (shown in the chart below) that they consider to be significant. The blue line in the chart clearly shows inflation heading back towards zero, which (fingers crossed) is excellent news and hopefully is coming from an “analyst” that will be correct in their prediction.