Joye: RBA's 'hot economy' experiment goes up in smoke

Brace yourself for a higher for longer rates cycle as the RBA’s ‘hot economy’ experiment goes up in smoke. That’s the view of Coolabah Capital’s Christopher Joye, who says the real risk facing investors is that further expected rate hikes fail to quash inflation that is now entrenched and gaining momentum.

The latest inflation data, which saw headline CPI rise to 4.6% in the year to March 2026, has all but locked in another 25 basis point rate hike in May. This would take the official cash rate to 4.35%, with interest rate markets pricing in at least one additional hike for 2026.

The tricky part for the RBA is that two of the primary culprits behind Australia’s inflation woes, namely high immigration and government spending, are out of the Central Bank's control. Joye’s view is that politicians lack the resolve required to take sufficient measures to curb these factors.

“Government spending and immigration have been far too strong for the Aussie economy to absorb. That's driving up the cost of living, driving up inflation, and driving up interest rates.”

With Treasurer Jim Chalmers set to deliver the 2026 Budget on the 12th of May, Joye says he has little confidence in the political class to deliver policies that will aid the RBA in its fight against inflation. Rather, Joye argues that a ‘Cathartic Crisis’ on Main Street is a necessity to bring inflation back towards the RBA's target range. His view is that voters will only demand change when they realise their cost-of-living struggles are directly caused by excessive government spending and high taxes.

“I don’t expect much of the political class until we have a cathartic crisis. Main Street will understand when they realise that while they might benefit from the NDIS, they are paying for it through an escalating cost of living, higher inflation, higher interest rates, and higher taxes. When people join those dots, you get a will for change.”

A sobering assessment of the economic outlook

The RBA hasn’t hit its inflation target since 2021, and its recent forecasting miss was the most significant bungle in over 25 years. Joye says the central bank has become a global "laughing stock" after being bullied out of its yield curve peg and forced into a humiliating double hiking cycle.

While the RBA is finally in "error-correction" mode, Joye believes they lacked the fortitude to go hard enough early on, pausing at 4.35% when their own models suggested 5% was the required destination. 

The predicament is further complicated by a perceived lack of independence. Joye points out the "bad look" of the RBA potentially needing to hike rates in May, just one week before the Federal Budget, noting that the central bank seems hesitant to criticise the fiscal spending that is fanning the inflationary flames.

With immigration and government spending acting as the primary engines of the economy, Joye warns that the private sector is actually shrinking, leaving Australia in a "per capita income recession." If the RBA is forced to push rates beyond 5% while the government simultaneously pulls the rug out from under population growth, the end result could be a recession unlike any we've seen before.

“I think we’ll get 100 to 125 basis points of hikes this year. If inflation remains stubborn and the RBA is forced to 5% or beyond, and politicians are forced to slash migration, we could see an Aussie economy with no population growth. We’ve never seen that before. Combined with fiscal consolidation, that probably leads to a recession.”

Implications across asset classes

It is easy to paint a pretty grim picture about the current state of the Australian economy and no doubt there are some valid reasons backing up those views.

For investors it pays to have your finger on the pulse and to be mindful of how the backdrop may impact your investments. But it is also important to remember that the market is not the economy, information is priced in very quickly and over the years (particularly in equities and property) it has paid to take a glass half full approach. 

When asked for a view on the outlook across asset classes Joye offered the following observations on equities, fixed income and Australian residential property. 

Risk Assets / Equities: The great disconnect

• The Verdict: Bearish on valuations, particularly in the US.
• The Rationale: There is a massive "dichotomy" between US equity highs and the reality of entrenched inflation.
• The Local View: Aussie bank shares are currently "55% overvalued" relative to bonds.

“The dichotomy between US inflation, which is also running super strong... is why equity valuations are at all-time highs."

Fixed-Income: Stay liquid

• The Verdict: Bullish on cash and senior bonds; highly bearish on "risky" debt.
• The Rationale: With deposit rates hitting 5%, cash offers infinite liquidity and zero risk - outperforming the dividend yields of major banks. Joye is steering clear of hybrids, private debt, and high-yield bonds, warning of a looming default cycle.

"Cash is king again. Make no mistake. It’s got no risk. It’s got infinite liquidity, infinite optionality."

Residential Property: Expect a pullback

• The Verdict: Expect a national pullback, though select regions will defy the trend.
• The Rationale: Higher rates will force national prices to "pay back" the 9–10% gains seen in 2025. While Sydney and Melbourne are already cooling, Brisbane and Perth remain "gangbusters" thanks to infrastructure booms and business-friendly policies.

“I could see the cash rate going into the five - six per cent rate range, which would be terrible for house prices.”

Watch the full interview by clicking here.