It is time again for one of our trips to a land down under. There is quite a bit going on and into the mix a few hours ago we heard from its Reserve Bank the RBA.
At its meeting today, the Board decided to leave the cash rate target unchanged at 4.35 per cent.
So we start from it being the highest of the main central banks and it comes with a type of mea culpa.
Inflation picked up materially in the second half of 2025, and information since the beginning of this year confirms that some of the increase reflected greater capacity pressures.
I put it like that because the last part of the sentence clearly tries to imply that the inflation failure is due to new evidence or “greater capacity pressures”. Whereas on the 26th of June 2024 I pointed out this.
The money supply is not showing that things are restrictive and seemed to be suggesting another push. I can update that now with the April figures which were 0.4% on the month raising the annual rate to 5.1%. So if we look ahead 18/24 months for inflation to be running at 2% we would need growth of 3% and the latter does not look likely as we recall Australia is in a GDP per capita recession and depression. So there is a clear risk for inflation two years ahead.
So an inflationary surge was in fact quite predictable and here were are according to the Aussie Statistics Bureau.
In the 12 months to June 2026: The Consumer Price Index (CPI) rose 3.8%, down from 4.0% in the 12 months to May 2026.
Oh and just to ram it home there was another signal it was likely.
Treasury had forecast in March that real government spending was on track to rise 6 per cent in 2024-25 – far higher than the 3.4 per cent average rate recorded in the two decades before the pandemic. ( Australia Financial Review)
Government spending was running hot too and if we add it to the inflation news it was in the past described as overheating. Whereas in fact the RBA embarked on a series of interest-rate cuts.
So we are in another failure by the RBA which has not improved its performance any since the previous Governor was forced to apologise to parliament.
Inflation Troubles
Along the way we see that there has been a more recent forecasting error.
While the impact of the Middle East conflict on inflation has so far been less than expected, headline inflation is still too high.
Plus the attempt to move to a more friendly looking inflation measure has not worked either.
Trimmed mean inflation also remains elevated and is little changed from the March quarter. Oil and most related commodity prices remain higher than they were prior to the Middle East conflict. Some firms experiencing cost pressures are increasing the prices of their goods and services and others are looking to do so.
There is an attempt to slap themselves on the back.
Financial conditions have tightened in response to three increases in the cash rate target this year.
So they are in their claims ready for this.
The disruption to global oil supply is adding directly to inflation and there are indications that higher fuel prices are being passed through to prices of other goods and services, so inflation is likely to remain high for some time. This inflation impulse is in addition to the effect of capacity pressures in the economy.
Except they are back in the last sentence to the consequences of the money supply and government spending which I pointed out in June 2024.
Bond Yields
These are back in the news as those reading yesterday’s comments section will have noted. For example the French ten-year has moved above 4% this morning and the UK equivalent above 5%. So the RBA effort to slap itself on the back is in troubled water.
Financial conditions have tightened in response to three increases in the cash rate target this year. Money market interest rates and government bond yields have risen, and the exchange rate has appreciated.
The Aussie ten-year has also nudged over 5% and is as much following world trends as the others. Indeed if there is a domestic influence pushing bond yields higher it will be the inflation performance ( as in lack of) by the RBA.
Commodity Resources
Some might say that the strength of the Aussie Dollar is related to its commodity resources and the perception that their value has been rising. You do not need to take my word for it as The Donald is on the case.
Donald Trump’s administration has provided a major funding boost to Australia’s hopes of unlocking non-Chinese supplies of a rare earth used in energy and defence applications with a $400mn loan to a Robert Friedland-backed company. (Financial Times)
This is interesting as the Aussie resources industry must be awash with cash so could easily have done this. We are also looking at a consequence of the theme that has led us for some years to describe Australia as the South China Territories.
Shares in Sunrise Energy, which is building a scandium mine about 360km (225 miles) west of Sydney, surged 18 per cent after the conditional US funding was announced on Monday. The rise capped a huge jump in the value of the Sydney-listed company in the past year to A$3.2bn (US$2.2bn).
It looks like that the US Cavalry has arrived and hopefully not the 7th Cavalry.
The Office of Strategic Capital, part of the US Department of Defense, said the loan was conditional on the Australian company meeting specific legal and technical requirements and included a right of first offer on Sunrise’s output.
Oh and a reply to the Financial Times article from Nad gives us a clue to the US interest.
Crucially an F35 needs over 400kgs of rare earths, processing most are controlled by China including Scandium, Samarium and Germanium and Neodymium. Lockheed have a deal signed with NioCorp Developments for Scandium.
Comment
Yet again the RBA looks confused.
Looks like Gov Bullock is following her predecessor’s footsteps by signaling one thing and doing another. Why lower the Cash Rate estimate in your forecast to show no more hikes, and then say the board is deciding on when the best time will be to hike again. ( Arno Ventner)
That issue is also in the statement.
But inflation is still too high. It is not expected to return to around the midpoint of the target range until late 2027 and there are upside risks to this projection. With monetary policy judged to be somewhat restrictive, the Board decided to leave the cash rate target unchanged while it assesses how the economy is evolving.
If the risk is of inflation above target then why not raise interest-rates?
From my point of view the situation is in fact worse as annual broad money growth has accelerated to 8%. In the past that alone would easily be sufficient for another interest-rate rise.
If I was a more cynical man I would suspect that this is the real reason why they did not raise interest-rates.
Momentum in the housing market has shifted, with housing prices falling in some capital cities and new housing loans declining noticeably