Now we play the interest rates waiting game, thanks to Philip Lowe

RBA Governor Philip Lowe has moved too little, too late. Now we play the waiting game to see what happens next.

RBA Governor Dr Philip Lowe appears at Senate Estimates in Parliament House.

Now we wait. You, me and most importantly Philip Lowe.

We all wait, we all watch, we all analyse over the next two months, and then at the start of February Governor Lowe delivers his next interest rate decision.

And make no mistake, by the bye, it will be – as indeed was Tuesday’s – his decision. The board will go along with what he and management propose.

There is no prospect of another RBA rate decision disturbing the long drowsy Aussie summer before February – absent the sort of left-field disaster that gave us the mid-March 2020 anti-Covid blockbuster that, frankly, helped create the mess we are now saddled with.

Between now and the end of January ‘we’ all have to watch – and try to analyse and add up – a whole complex of dynamics, across the geo-political and geo-economic and very much local spaces.

The really big ones, as I have been telling you, are Russia and China. Russia and Ukraine, China and Taiwan. Russia and oil and gas. China and its zero-Covid and domestic economic activity.

But that’s only the – rather monumental – start of what we have to watch, digest and try to pull together.

There is what’s happening and developing in the US – Wall St, what the Fed does mid-month, US economy, etc etc.

Then there’s what happens back home, in little ole’ Australia.

The single most immediately significant marker for that first RBA meeting for 2023 will be the December quarter inflation, published a week ahead of the RBA meeting.

Lowe has locked in an expectation that it will be bad; he repeated Tuesday the RBA’s expectation inflation would finish 2022 at a “little under 8 per cent”.

Further, importantly, the RBA expects that to be the peak; for inflation to then go into reasonably sharp decline.

There are two possible outcomes.

Inflation comes in somewhat lower than the expectation. Or that it either comes in higher than the expectation or the dynamics that are supposed to then send it lower are not obvious.

The first could see Lowe kick off the new year without a rate hike – again, subject to all those ‘other’ things. Which could either be reinforcing a no-hike decision, or arguing against it.

The second could guarantee another 25-pointer and even indeed force Lowe to go back to 50 points.

Further, just to complicate matters for your, what I’ve discussed is only the ‘first-stage wait and watch’. Then we have to see how 2023 unfolds, in all its messy complexity.

Anyone trying to tell you ‘they know’ is a charlatan. And there are plenty around, ranging from racetrack-style spiv tipsters, to so-called financial or economic ‘experts’.

Let me make some more points.

I told you a month ago, after the Cup Day decision that Lowe had locked himself into 25-points in December. Very simply he couldn’t go back to 50 points, he couldn’t go to zero with an upcoming 8 per cent inflation print.

Right now, he would be thinking 25 points or a pause in February.

Right now, I think he is still – dangerously – behind the inflation game. As I wrote before the November decision, he really had to do 50 points in both November and December. He opted for two 25-pointers.

What I seem to be the only person to note, is that in real terms, even yesterday’s 3.1 per cent official rate is way negative – and still highly stimulatory - in real terms.

On the September year 7.3 per cent inflation it is actually a negative 4.2 per cent; it will go to more like negative 5 per cent ahead of the February rate decision.

Lowe’s trying to engineer an inflation soft-landing. If he fails, the rate pain will then have to get 1980s-style brutal.

Originally published as Now we play the interest rates waiting game, thanks to Philip Lowe