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14 Jul 2023 - Hedge Clippings | 14 July 2023



Hedge Clippings | 14 July 2023

Have We Reached the Tipping Point of Inflation?

As widely predicted by all and sundry, and frequently hinted by Treasurer Jim Chalmers, RBA Governor Philip Lowe's seven year tenure will end in September, to be replaced by current Deputy Governor, Michele Bullock. While there's a change at the top, and about to be widespread changes to the bank's board structure and decision making, the appointment provides continuity of the outgoing Governor's thought processes - assuming there was cohesion and agreement between the two over the past couple of years.

We'd expect that to be the case. Both are longstanding RBA employees, Bullock with 38 years under her belt, whilst Lowe has 43. Jim Chalmers noted that the incoming Governor will provide a "fresh perspective", but we doubt it will cause major underlying changes to the overall approach, or the bank's actions when it comes to interest rates.

Lowe has taken all the heat from the rate rises that the RBA has announced over the past 15 months, and of course for his earlier comments that rates wouldn't rise from an unprecedented 0.1% until 2024. Those earlier comments have been used by all and sundry, plus Chalmers and Albanese, to point the blame at Lowe for the fact that global inflation has caused rates to rise across the western world. The fact is that Australia's inflation rate is less than the UK's, on a par with the Eurozone, and until this week's surprise number, the US as well. Australia's cash rate at 4.1% is less than both the UK and the US, both at 5.0%.

The government has been happy for Lowe to be blamed, having done nothing to help. In fact, they did the opposite by supporting wages rises that are yet to flow through the system. They've done nothing to try to control the inflationary impact of higher energy costs in a country where exports account for 70% of thermal coal production, and 82% of our gas. According to the Australia Institute as of 2020, only 1% of the gas produced in Australia is used in Australian manufacturing, less than 10% of the amount the LNG export industry uses itself. Twice as much gas is used just running gas export terminals as is used by Australian households. Whilst we're proud capitalists, and not fans of government control, one would have thought Canberra (on both sides of politics) might have stepped in somewhere or somehow along the line.

For Bullock, the timing couldn't be better, and in our humble opinion she's a good choice. She's perfectly qualified, full of appropriate experience, and after 38 years, understands the bank.  She comes in at a time of change, but will presumably maintain the current course. And for Chalmers, it allows the blame for mortgage pain to be laid squarely at the feet of Philip Lowe, just as it looks as if he might have achieved his "narrow path" balancing high inflation, low growth, and close to full employment. Just in time US inflation numbers have peaked, with this week's annual figure at 3%, down from 9.1% a year ago.

With the delayed effects of the 13 rate rises to date working their way through the system, we may, or may not, see a (mild) recession by the end of the year. If we avoid one, we'll no doubt hear all about it from Dr. Chalmers, but how much credit he'll give to Philip Lowe is less certain.

The CPI numbers due on 26th July will be critical.

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