Reserve Bank Of Australia Needs To 'Go Much Harder' In Raising Interest Rates: Portfolio Manager

In the realm of economic battles, one adversary stands tall, unyielding and unwavering: inflation. We've watched as it continues to rear its head, dancing in the sevens, while wages struggle to keep up, barely treading water in the threes. The result? Our real wages, the very lifeblood of our prosperity, are dwindling. Inflation, my friends, is nothing less than a tax upon us all, a relentless predator, and it's pushing our living standards down the precipice. It's time we discuss the urgency of tackling this foe head-on.

The Need for a Swift Approach

The prevailing view, as it stands, aims to return inflation to a modest three percent by the year 2025. However, the path toward that goal appears to stretch into the distant horizon. What I propose, and I do so with conviction, is that we need to expedite this process.

Why, you ask? Consider this: in Australia, a staggering 70 percent of the Consumer Price Index (CPI) comprises services, and wages play a pivotal role in shaping this landscape. When wages spiral out of control, they become stubbornly ingrained, deeply embedded in the fabric of the economy. This stickiness poses a formidable challenge, making inflation harder to combat. The Reserve Bank of Australia (RBA) holds the key, a window of opportunity to wrestle inflation to the ground before it becomes an even mightier beast.

Pragmatism or Haste: The RBA's Dilemma

But here's the question we must ponder: Has the RBA, in its quest to navigate these turbulent waters, been overly pragmatic? The answer, dear readers, isn't a straightforward one.

The RBA faces an arduous task, a delicate dance, if you will. They must be data-dependent, treading carefully to slow down the economy in measured strides. While I do not entirely dismiss their approach, I contend that it's too early to hit the brakes on interest rate hikes. Inflation still looms large, firmly entrenched in the sevens. We're witnessing robust economic growth and a staggeringly low unemployment rate at three and a half percent. In Australia, if you want a job, it's there for the taking. It's an enviable starting point for the RBA.

The Enigma of Equity Markets

Now, let's shift our gaze to the world of equity markets, which can be as puzzling as any ancient philosopher's riddle. The ASX, our Australian stock exchange, recently shot up by approximately 50 basis points, creating a buzz of anticipation. However, what should we expect in the days to come?

We stand at a precarious juncture. Not too long ago, we were at record highs, scaling heights that seemed unfathomable. But like a ship caught in a tempest, we've experienced a substantial retraction.

Two camps have emerged. On one side, there are those who believe the ASX 200 can traverse the flatline, displaying resilience in pockets, particularly in commodities. On the other, there's the ominous prospect of the Australian consumer facing an arduous test, marked by less resilience compared to their U.S. counterparts. The savings rate and mortgage rates tell a tale of their own.

The Complacency Conundrum

Now, as we assess the future of equity markets, a sense of complacency lurks in the shadows. Earnings yields, the lure of investment in stocks versus what you could earn at your local bank, present an interesting juxtaposition. Banks offer nearly four percent returns, only a whisker away from the earnings yield on the stock market.

But, let's not kid ourselves. Our equity markets are somewhat napping. They appear complacent, seemingly unaware of the impending winds of change. The trajectory of inflation, the looming specter of an economic slowdown; these factors demand our attention.

We must exercise caution, though not to the point of paralysis. Australia, with its resilient foundation, is well-equipped to weather the impending storm. Yet, caution remains our watchword, especially considering the stock market's remarkable resilience since the start of the year.

In this ever-shifting landscape, as we grapple with inflation, the RBA's role, and the enigma of equity markets, one thing is clear: complacency is a luxury we can no longer afford. The winds of change are upon us, and it's time to hoist our sails and steer our economic ship toward safer shores.