If electricity prices are why Australia’s now hiking rates again – why did the RBA cut?

There were hopes the ASX 200 (or XJO if you prefer) had already priced in a rate hike, and for a brief few minutes after the RBA cash target hike to 3.85%, it looked like that might actually be the case. Keyword, briefly.

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Cue ten minutes later, and the XJO had sunk by around ~25pts – not great, not terrible. I guess whether or not the ASX had priced something in remains half-philosophical and half-retrospective. Here, let me tell it in meme format.

Market watcher: “It’s priced in bro.”

The pricing in:

Still, not too bad – it doesn’t appear we’re set to pare off all of day’s gains, and for just about everyone, the rate hike was well-expected and hardly shocking. The best-case scenario was always going to be a pause.

But hang on. Why did the RBA cut, then?

Now, as far as it appears to me, there’s one very big question we have to ask of Australia’s Central Bank, and for that matter, the Australian Treasurer.

Because in October last year, we got the first shock CPI jump that first rattled nerves; we learned then the country’s inflation problem is actually deteriorating (after a period of improvement) because of higher electricity costs.

The same story was true for the latest CPI data we got last month, where we learned that while core inflation is sticky at 3.3%, headline inflation is pretty much back to 4% – or not far off, at 3.8% And, why is inflation back to 3.8%? Because in the latest data we got for December CY25, much like in the data drop we got last October, the culprit is once again electricity prices.

Electricity prices are going up because the Federal government has taken away power bill rebates, which provided Australian households with support for power bills – in other words, the government footed the bill on behalf of taxpayers. Some State gov’ts did the same, giving some lucky Australians a double dose.

But now those rebates have dried up. Cue a surge in electricity prices.

So our disinflation wasn’t actually real, then?

Well, reader, I’ll admit now we’re on the same wavelength. Because if the smartest minds in the policy-writing department – assuming there are a few – and the RBA couldn’t spot what would happen here, some pretty big questions become apparent.

The first is, why did the RBA raise at all? Which I asked rhetorically in the last paragraph, in case it wasn’t obvious, I don’t know. And I don’t think anybody else does either.

Because here’s the bigger issue in my mind. When the Treasurer (or the RBA Governor herself) say ‘inflation is rising because we’ve removed power rebates,’ well, that’s the good spin. Here’s the real story: In retrospect, it’s manifestly obvious that electricity price rebates were artificially pushing down the CPI basket.

Are we to expect to believe that nobody saw this coming? We’re now the only G10 country to hike rates again, at least so far. And didn’t Philip Lowe lose his job because of a perhaps-similar bungle not that long ago?

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