Another first Tuesday of the month happens tomorrow so I’m being continually asked if the Reserve Bank will raise the cash rate again. I reply that I’m actually more qualified as an economist to tell you if they should raise rates, but if I were a psychologist, I might be better at working out what Dr Phil and his board will decide.

The economics tells me he should pause, but with amateur psychologist hat on, I tip he’ll raise by 0.25%. But I hope he doesn’t.

Economists expect the RBA to raise interest rates again by 0.25% taking the cash rate to 3.6% but the question is, should there be another hike, given the run of economic data? And knowing interest rate policy works with a lag (meaning it can take six to 12 months before a rate rise actually bites to hit spending and lower inflation) adds credibility to my argument that it’s time for a pause.

Let’s look at the data that says a pause makes sense, so here goes:

1. The monthly inflation reading was less than expected, with annual inflation falling one percentage point from the annual pace of 8.4% in December to 7.4% in January.
2. Real GDP rose by 0.5% in the fourth quarter of 2022 to be up 2.7% levels on year ago. This was smaller than expected and is another reason for the RBA to think twice about too many more rate rises.
3. The Westpac-Melbourne Institute Consumer Sentiment Index fell 6.9% from 84.3 in January to 78.5 in February into what was headlined as “deep pessimism”!
4. New lending for housing fell by a larger‑than‑expected 5.3% in January — that’s down 12 months in a row and shows the RBA’s rate rises are working and maybe we’re close to the top.
5. Building approvals fell by 27.6% in January, which isn’t good witfor the industry but it’s another sign that the RBA should think about ending its rate rise program.
6. Business investment and dwelling construction contracted over the December quarter, while inventories were also a drag on activity.
7. The Wage Price Index (WPI) rose by 0.8% a quarter in the fourth quarter of 2022 and the annual rate stepped up to 3.3%. Private sector wages grew by 0.8%, while public sector wages rose by 0.7% over the quarter. This softer wages index lends weight to the case that the RBA should pause very soon in the tightening cycle.

Put all this together and add in the mortgage cliff that will take 800,000 borrowers from low fixed rate loans to high variable rate loans and we have a recipe for an economic disaster, that will kill inflation by itself!

This quote last week from the CBA’s economics team made me think it’s time for the RBA to have the guts to pause: “Two further 25bp rate hikes, which we anticipate based on the RBA’s recent communication, makes the ‘soft landing’ increasingly hard without monetary policy easing later this year.”

They are worrying that the expected excessive rate rises will possibly give us a recession that will then force the RBA to cut rates before the year is out!

When you throw in Westpac’s chief economist Bill Evans last week telling us that we should expect seven rate cuts in 2023 and 2024, it makes me think the RBA could be taking the economy down further than it needs to go.

It all makes me ponder this: could the RBA do better than this? I think a pause now would be a sound policy play, but I’m not expecting it.