The RBA blinks

Surprise move by the RBA this afternoon, increasing the cash rate by only 25 basis points to 2.60%. Well below the widely expected increase of 50 basis points.

This move is a huge mistake by the RBA. Now is not the time to show weakness and turn dovish. Inflation is still running far to hot. The monthly figures out last week showed no slowdown in core inflation, the labour market is still incredibly tight, and consumer spending has remained well above trend. Inflation expectation out this morning were up 0.6%!

There are no signs of inflation slowing and pulling back on the pace of interest rate rises will only send the wrong signal to the market and households, further stimulating inflation.

Finally the AUD has been under significant pressure the last week and needs further support. A doveish pivot by the RBA will do nothing to help the AUD maintain its value and a lower AUD means more imported inflation.

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Household savings will fuel inflation