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Hedge Clippings | 09 February 2024

Last week's Hedge Clippings didn't linger too long on the potential outcome of Tuesday's RBA Board meeting - the first to be held under the new two-day format - so it wasn't difficult to forecast "there's little chance of a rate rise when the RBA meets next week for their first meeting of the year". However, the statement issued following the meeting - the first issued by the Board as a whole, rather than just by the Governor - was pretty clear in its warning that the economic outlook is "still highly uncertain" and that inflation, or returning it to "target within a reasonable timeframe" remains the Board's highest priority.

No doubt the Board's collective statement indicating that inflation's return to target was taking too long - but pointedly including that further increases in interest rates could not be ruled out - was part warning, and part risk-covering given the problems Philip Lowe encountered by making a prediction. However, Michele Bullock's opening statement at her appearance in front of the House of Representatives Standing Committee on Economics, delivered this morning, gave further detail on the Board's thinking, including that their inflation target is actually in the middle of the 2-3% range, specifically 2.5%.

Inflation peaked at 7.8% in December 2022, falling to 4.1% in December 2023. Now for the difficult task of squeezing the next 1.6% out of the system while maintaining full employment and avoiding a recession, against a backdrop of geo-political strife, supply side issues, weak labour productivity, and across-the-board cost increases thanks to increased wharf costs. A balancing act indeed.

As such the Board is not expecting their inflation target of 2.5% to be met for at least 2 years, or until sometime in 2026. As Bullock put it in her address this morning, "we have some way to go..." which we'll take to mean that barring a recession, don't expect any significant easing in the cash rate in the next 6 months or so.

On to politics...

In Canberra this week Peter Dutton accepted - although he was careful not to endorse - Albo's broken promise on already legislated Stage lll tax cuts. As expected, the decision also opened the door - or debate - for wider changes to the tax system, particularly negative gearing. This takes the government into more dangerous places, as discovered by Bill Shorten when he lost the 2019 election, in large part due to his intention to remove franking credits - which the coalition dubbed a "retiree tax" - and to effectively keep labour in opposition for a few more years.

As for Albo's reputation for keeping promises, he's now on the record as having broken one, as well as no longer supporting the whole tax package he and the labour party voted for when they were in opposition. No longer can he claim "my word is my bond," but being a politician, did anyone really believe that in the first place?

Finally, over to the USA where Joe Biden has been described (probably accurately) as presenting to a jury as a "sympathetic, well-meaning, elderly man with a poor memory." At the risk of upsetting our Trump supporters, Donald probably also qualifies as presenting to a jury (and recently to a judge) as an "elderly man with a poor memory." We're not so sure about the "sympathetic, well meaning" tag however.

Just to confirm the elderly man with a poor memory tag, Biden then proceeded to respond to the accusation by mixing the presidents of Egypt and Mexico. For the record, one's called Abdel-Fattah Saeed Hussein Khalil el-Sisi while the other is Andrés Manuel López Obrador, and while sounding very different, yours truly would probably mix them up as well.

Maybe the "elderly man with a poor memory" tag fits closer to home than I'd like to admit!

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