Last week the Reserve Bank of Australia confirmed what we already knew was coming. Interest rates are moving higher and probably much faster than most expected.
But we think the central bank will stop well before the economy is pushed over the brink, provided inflationary pressures do prove to be transitory. If not, we might be on the receiving end of another “recession we had to have” and while it might be short, it will be ugly if for no other reason than many younger Australians don’t even know what a recession is like.
We do think some context is needed. Australia’s economic outlook is still very solid. Our country was locked up much longer than many other developed economies through 2021, and there is a normalisation that is continuing to play out through the services sector. We don’t think equity investors should be scared off by the prospect of higher interest rates just yet. The one-way trade where the market only went up is gone and in its place is a more normalised backdrop. But if recession is not imminent then the equity market should, which would still put the cash rate below neutral .