Perspective with Heather du Plessis-Allan: The inflation fight is over, but the economy still suffers

Heather du Plessis-Allan Drive

Well, how good is that inflation number out today?

2.2 percent - we're there, baby! We're pretty much bang on where inflation is supposed to sit - at 2 percent, halfway between 1 and 3 in the target band.

We’ve made it. We have had inflation run out of control in this country for three years, but we have finally got it back to where it’s supposed to be. That is absolutely reason to celebrate - we're there.
And yet we can’t, because of the Reserve Bank.

Let’s talk about how badly these guys have stuffed this up. Even though I am stoked that we're at 2.2 percent today, it is also, unfortunately for the Reserve Bank, a pretty big signal that they’ve messed this up.
Because look at where the Official Cash Rate is sitting. It is still at 4.75 percent. So we've got inflation exactly where we want it, and yet we have an Official Cash Rate that is still higher than what the Aussies have - where their inflation is not in the target band.

Now explain that to me. Because our inflation is where it’s supposed to be and we have an OCR of 4.75 percent, while Australia's inflation is still much too high and they have an OCR of 4.35 percent. How does that happen?
Simple explanation - our Reserve Bank overdid it by punishing us. They've realised it, which is why they are now dropping the Official Cash Rate faster than they expected to. And I reckon they’ll have to go even faster.

Just watch the number of economists lining up to say a 50bp cut in November is not enough and we need a 75bp cut to get that OCR down fast.

Because the longer it stays that high, the more people lose their jobs, their houses, and their businesses - because that is the cost of the Reserve Bank making this mistake of overcooking it.

And you wanna know the worst bit about them stuffing it up? Our economy will still be paying the price for the OCR being too high right now for probably another year. That is how long it takes the OCR to wash through the system.

So we officially have inflation in the right place today - October 16, 2024. But we will still be punished for another year by that OCR being as high as it still is.
So the inflation fight is over, but the punishment is not over.

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