The Reserve Bank of Australia (RBA) is widely tipped by economists to keep interest rates on hold at Tuesday’s monetary policy meeting, which will be Michele Bullock’s first as governor.
There are good reasons to keep rates on hold, including:
- Despite the lift in petrol prices, core inflation (excluding volatile items) is still trending lower.
- The domestic economy is weak with Australia experiencing a per capita recession, with household consumption and retail sales falling in real terms.
- The labour market is weakening with falling job ads, rising numbers of applications per job ads (above pre-covid levels), and Roy Morgan’s unemployment measure rising to March 2021 levels.
- Australia still has a large number of fixed-rate mortgages to expire, which will lift average mortgage rates. Therefore, we still have lots of monetary tightening built in.
Accordingly, the RBA can afford to wait and observe the data to see how it evolves.
On Monday night, I was interviewed by Caleb Bond at Sky News about inflation and interest rates where I explained the above, including how the fixed rate mortgage reset will continue to lift average interest rates across the nation:
“Although the RBA has been on hold since June, average mortgage rates continue to rise. And that’s because we’ve got a very large number of fixed-rate mortgages that are still rolling over these variable rates. So, they’re basically going from 2% rates to 6% rates”.
“That process is going to continue into next year. And what that effectively means is that even though the RBA is on hold, the average mortgage rate paid by Australians is going to keep rising”.
“So we effectively are going to continue to have monetary tightening”.
“[The RBA have] basically said at the last few meetings that they want to just observe the data. I think that’s the right approach. The labour Market is weakening. We’ve got a per capita recession. Obviously household consumption and retail sales are falling in real terms”.
“So there is some weakness there. And I think they’re just going to take a wait-and-see approach, which is the right thing to do”.
The full five minute interview covers other things and can be watched above.
