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Printed: 29 May 2024 7:10 PM


28 Apr 2023 - Hedge Clippings | 28 April 2023



Hedge Clippings | 28 April 2023

Economic Cross Winds

Following last week's release of the Review of the Reserve Bank, which targeted the RBA's culture, management and performance, the focus now returns to next week's board meeting, and the potential for an extension of the policy pause announced in March. Supporters of this view - by no means unanimous - were encouraged by this week's inflation figure which saw annual inflation to the end of March fall to 7.0%, down from December's 30 year peak of 7.8%.

Others saw it differently, particularly those who pointed out that inflation at 7% is still at least 4% above the top of the RBA's target range of 2-3%, and are wary of the inflationary effects of wages policy, plus any inflationary impact from the Government's first budget, due on Tuesday week. Thereafter it is going to be more difficult for Chalmers to blame Scomo (a.k.a. Minister for Everything) and Josh Frydenburg for Australia's inflationary and economic woes, when the root cause of the current situation was global or external.

Our call is for a continuation of the pause, even if only for a month until the budget is out of the way and the picture is clearer. However, barring a recession, expectations are for inflation to remain elevated for longer than the RBA expects, so it is likely to be well into 2024 or beyond before Australia's inflation rate starts with a "2", by which time, if Jim Chalmers has anything to do with it, Philip Lowe will be long gone.

Turning to the US, there is also a Fed meeting scheduled for next week, with the Federal Reserve chairman Jerome Powell facing further economic cross winds as core inflation picked up in the March quarter, while growth was just 1.1%, well under the median forecast of 1.9%. Higher inflation, coupled with lower growth, is not a positive formula, particularly while the Fed is also grappling with falling confidence in the banking system as San Francisco based First Republic Bank suffered withdrawals of 40% of its deposits in the first three months of the year.

Coming on the back of the collapse of US banks Silicon Valley and Signature, and the Swiss National Bank's emergency liquidity of US $120 billion to support the UBS absorption of Credit Suisse the risk of contagion in the US and the global banking system is heightened.  This article from the Economist Intelligence Unit - although a few weeks old - argues that financial contagion is unlikely. However, if consumers or depositors' confidence is shaken by the chance of their loss of capital, this could change very rapidly.

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