A key point which I have been making with regard to inflation, interest rates and monetary policy is that the Reserve Bank will not give any indication of easing before mid-2025 until they see a solid easing in business pricing intentions.
The main measure of these intentions comes from the monthly ANZ Business Outlook Survey which recently showed a net 47% of businesses plan to raise their prices in the coming year. The long-term average consistent with inflation just above 2% is 25%, so we are well off the necessary level of price planning.
But the results from my own monthly business survey give cause for hope. Whereas on average over the past year a net 14% of businesses have said they plan boosting their prices, the reading has just fallen from 16% in March, to 5% in April and now to -12% in May.
It looks like pricing plans are changing.
Why are they changing?
Probably because the state of the economy is becoming increasingly poor. Household confidence has fallen anew, house prices are falling on average 0.3% a month, job security has sharply declined, and business investment plans have worsened.
I feel more confident in the view I have been running for quite some time now that after over-stimulating the economy for too long after the pandemic, the Reserve Bank is now over-restricting it. The outcome is likely to be a cut in the official cash rate from the 5.5% in place since May 2023 before the end of this year.
After that initial cut a quick series of reductions is likely to see the rate fall all up about 1.0% before the central bank perhaps pauses to see how things are going.
But they face zero incentive at the moment to give any hint that they will shift the timing of their first planned rate cut from the mid-2025 period they have pencilled in. We are only now entering the period 18-24 months along from when monetary policy truly got tight from November 2022 with the 0.75% rise in the cash rate then and the warning of recession.
Only now are businesses starting to acknowledge that even if their costs are still rising, they cannot blindly pass them onto consumers as has been the case for the past three years. They are only now starting to make hard and painful decisions about staffing levels, which products to stop producing, which locations to move away from, and so on.
This is the most important adjustment period of the monetary policy tightening cycle
If the Reserve Bank were to express happiness about inflation now, they would risk businesses pulling back from these tough decisions and instead reverting to the no-brainer option of recovering costs by raising prices.
For the economy this means the approaching winter will be hard, and with increasing evidence of a wave of investors looking to offload property because of rising costs and the need to fund their retirement or shore up their businesses, the housing market is likely to remain highly favourable for buyers.
If I were borrowing at the moment, I would personally still feel inclined to fix for just a short period of time, willing as I would be to back my view that the Reserve Bank will blink before the end of the year and engage in a period of catch-up easing.
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