The RBA is loosening prematurely

The RBA doubled down on their dovish pivot in the minutes of their November board meeting released this week, declaring they are prepared to pause rate increases for a period.

“Acknowledging the uncertainty, members did not rule out returning to larger increases if the situation warranted. Conversely, the Board is prepared to keep rates unchanged for a period while it assesses the state of the economy and the inflation outlook. Interest rates are not on a pre-set path.”

This is a significant de-facto loosening of monetary policy that was reflected in the implied future cash rate. Since the end of October market prediction of the peak cash rate have fallen from 4.170% to 3.780% yesterday.

This feels like an overly aggressive move by the RBA. They are jumping the gun and loosening monetary policy prematurely. I would have liked to see the following key indicators turning the corner before the RBA slowed or paused rate increases:

⭐️ Consumer spending falling at least back to trend. It currently remains well above trend and has been above trend for years.

⭐️ Inflation expectations falling back towards the target range. inflation exceptions are currently running at 6.5% and have been consistently above 5% for over a year.

⭐️ Unemployment increasing back to trend levels. The unemployment rate was at an all time low of 3.4% and has fallen consistently all year.

⭐️ Some moderation in the ABS's new monthly inflation indicator. While this is a new indicator, it gives a much more timely picture of inflation and have been rising each month since it's introduction.

As Jerome Powell said recently the majority of risk for central banks is in not tightening enough.

"From a risk management standpoint, remembering of course that if we were to over-tighten, we could then use our tools strongly to support the economy, whereas if we don't get inflation under control because we don't tighten enough, now we're in a situation where inflation will become entrenched and the costs, the employment costs in particular, will be much higher potentially. So, from a risk management standpoint, we want to be sure that we don't make the mistake of either failing to tighten enough, or loosening policy too soon."