Going into Tuesday’s monetary policy meeting, Bloomberg’s survey of economists were 50-50 divided on whether the Reserve Bank of Australia (RBA) would lift the official cash rate (OCR) from 4.10%.
I personally believed that the soft economic data did not warrant hiking. This is especially so given the huge volumes of cheap fixed rate mortgages expiring, which will see borrowers switch from cheap pandemic rates of 2% to variable rates above 6%.
However, I thought the RBA might do one more hike for ‘tactical’ reasons: i.e. so that new governor Michele Bullock can take over in October with the OCR at its peak.
Then Bullock could cut and be hailed a hero: a perfect way to start her term.
With this background in mind, the RBA chose to keep the OCR on hold at 4.10% at Tuesday’s monetary policy meeting.
The statement accompanying the decision noted that the rapid rate hikes “are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so”.
“In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month. This will provide further time to assess the impact of the increase in interest rates to date and the economic outlook”.
The RBA cautioned that “inflation in Australia is declining but is still too high at 6%. Goods price inflation has eased, but the prices of many services are rising briskly. Rent inflation is also elevated”.
“The central forecast is for CPI inflation to continue to decline, to be around 3.5% by the end of 2024 and to be back within the 2–3% target range in late 2025”.
The economy is also expected to remain on a slower path, with a per capita recession forecast for 2023 and 2024:
“Household consumption growth is weak, as is dwelling investment. The central forecast is for GDP growth of around 1.75% over 2024 and a little above 2% over the following year”.
The labour market is easing; albeit remains tight:
“Job vacancies and advertisements are still at very high levels, although firms report that labour shortages have lessened. With the economy and employment forecast to grow below trend, the unemployment rate is expected to rise gradually from its current rate of 3.5% to around 4.5% late next year”.
Wage growth is also contained:
“At the aggregate level, wages growth is still consistent with the inflation target, provided that productivity growth picks up”.
The RBA also notes that the impact of rate rises is uneven:
“Many households are experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income”.
“In aggregate, consumption growth has slowed substantially due to the combination of cost-of-living pressures and higher interest rates”.
The RBA believes “the recent data are consistent with inflation returning to the 2–3% target range over the forecast horizon”, but warns that “some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon the data and the evolving assessment of risks”.
In other words, the RBA will remain on hold unless data surprises on the upside.
