Have we reached the top of the interest rate cycle?

I'm not an interest rate strategist, economist or economic commentator, but could we have just reached a turning point in the RBAs tightening cycle on interest rates?

I was having lunch today with a group of friends to discuss a property project we are doing and I put it out there that I thought the next move for interest rates could be down. My friend the stock broker raised his eyebrows and reminded me most analysts are predicting 1 to 3 hikes before the end of the year.

Why do I think maybe not? Well apart from all the eurozone, US and China-slowdown stories that seem to be gathering...and gathering momentun, I read with a lot of interest a few Robert Gottliebsen posts on Business Spectator over the last week in particular, "Prepare for waves of economic pain", "An erring RBA tempts recession" and "A slow RBA dawn".

He makes some compelling points on the current state of the Australian economy, and in particular, I suppose I was struck with just how passionate he makes his point in all these pieces. He always struck me as a pretty calm and considered personality!

He calls for the RBA to quickly join the "real world" and experience what its like in the non-mining sectors of the Australian economy. And goes on to assert that the "RBA have not grasped the seriousness of the situation in non-mining Australia" and "if they do the job properly they will take higher interest rates off the agenda unless they believe that it is absolutely necessary to throttle non-mining Australia and its standard of living so we can rush into trying to do too many mining projects at once."

Add to Robert G's tirade this piece from Ricardian Ambivalence in which he speculates that the RBA may be rethinking their inflation forecasts. He thinks "the Q1 national accounts may have materially changed the identification of the inflation pulse. This is a bit technical sounding but it really boils down to how they apportion the increase in inflation between supply and demand."

"The weakness in Q1 production side numbers may have motivated a change in the Bank’s identification of the underlying inflation pulse, and hence a decrease in the confidence around their assessment that underlying inflation was picking up and likely to push up above their 3% threshold in 2013.

My guess is that the Bank now awaits Q2 CPI to update its CPI forecasts – and that it will then respond on the basis of these new forecasts.

So — what’s the RBA going to do next? I don’t know – but I think inflation is probably picking up, so my guess is that they hike at their August meeting … however I will be wrong about this if Q2 CPI is low (say +0.5%q/q)."

So maybe its a bit too early to call the top, but it feels to me like we could be close to the top of the cycle. If its true it will make for an interesting second half to the year with affordability slowly improving, surplus stock on the market and early signs of a rebound in home lending. The chart below illustrates just how sensitive the Australian market is to monetary policy...

House Prices versus Interest Rate_RP Data_to Jan 10

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