No images? Click here   The RBA should warn that it could raise rates again High inflation reinforces that the RBA should have raised rates by more last year, in line with its peers. Kieran Davies, Chief Macro Strategist, Coolabah Capital Investments Over at Livewire Kieran writes that high inflation and a still-tight labour market should see the RBA backtrack on policy and resume warning that it could rate rates again, something that CCI’s analysis has long suggested they should have delivered on last year. Strong inflation at the start of this year places the RBA in a very uncomfortable bind when it meets next month to revise its outlook and decide on interest rates.  The RBA had recently turned neutral on interest rates, emphasising that it was “not ruling anything in or out”, but now seems likely to backtrack and warn again that the next move in interest rates could be up, with the governor likely regretting that her predecessor did not follow the RBA’s peers and raise rates more last year. Echoing the experience of several other countries, underlying inflation accelerated in Q1 and is tracking well above the RBA’s forecast profile, with the trimmed mean CPI rising by 1% in Q1 and with the trajectory of the monthly CPI suggesting that it could plausibly increase by 0.9% or more in Q2.  At the same time, the labour market still remains tight in that unemployment of 3¾%, while off its multidecade low of 3½%, remains below the RBA’s 4½% estimate of full employment. These developments should force RBA staff to revise up near-term forecasts for inflation and employment and temper the expected increase in unemployment when the bank’s outlook is updated in the Statement on Monetary Policy, due the same day as the 7 May interest rate decision. Higher inflation and a still-tight labour market should trigger an active discussion among board members about whether they need to raise rates further, particularly when there is a risk that it takes longer to return inflation to the newly-mandated midpoint target of 2½%.  Board members would also be disappointed by the mix of inflation, where CCI’s experimental measure split of the trimmed mean CPI points to a rapid acceleration in already-high core services inflation, with slow growth in core goods prices contrasting with the flat-to-down moves seen in other countries.  CCI’s policy rule analysis has long suggested that the RBA should have followed its peers and raised rates to about 5%, but the RBA purposefully decided to raise rates by less than its own outlook would imply in order to limit the damage to unemployment.  Some policy-makers might continue to run that line given weak economic growth, but that view should be challenged by July’s income tax cuts, which are worth $21bn for the financial year as a whole, equating to about ¾% of GDP.  The RBA believes that the rejigging of these cuts towards low- and middle-income taxpayers will not have much effect on the outlook, but there is the clear risk that cash-constrained households spend the money at a time when rising house prices are driving wealth higher and real incomes are past their low point.      Underlying inflation was well above official and market forecasts in Q1.   Underlying inflation is tracking well above the RBA’s quarterly forecast profile.   Unlike other countries, CCI’s experimental split of trimmed mean inflation suggests that core goods prices are still growing, albeit slowly, while strong services inflation has accelerated sharply.   You can read more of Kieran’s insights at Livewire Markets.       For further information please contact us on 1300 901 711 info@coolabahcapital.com | www.coolabahcapital.com Disclaimer: All investments carry risks, including that the value of investments may vary, future returns may differ from past returns, and that your capital is not guaranteed. This has been prepared by Coolabah Capital Investments (Retail) Pty Ltd ACN 153 555 867 (Coolabah), an authorised representative (#000414337) of Coolabah Capital Institutional Investments Pty Ltd ABN 85 605 806 059 AFSL 482238, to provide you with general information only. In preparing this publication, we did not take into account the investment objectives, financial situation or particular needs of any particular person. It is not intended to take the place of professional advice and you should not take action on specific issues in reliance on this information. The Product Disclosure Statement (PDS) and Target Market Determination (TMD) for the Fund should be considered before deciding whether to acquire or hold units in it. A PDS and TMD for the Fund can be obtained by visiting www.coolabahcapital.com. 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