Yahoo Finance RBA has questions to answer after latest rate hike
The RBA is sending mixed messages with its comments around the latest interest rate hike.
Nine interest rates hikes have now been delivered by the Reserve Bank (RBA) since May 2022, making it the most aggressive monetary policy tightening since at least the late 1980s.
The official interest rate set by the RBA is now 3.35 per cent - 325 basis points higher than the recent low point of 0.1 per cent less than a year ago.
Surprisingly, the RBA is still anxious about inflation. Indeed, right through to the middle of 2025, the current RBA forecasts are for inflation to remain at or above the top of the 2-3 per cent target band, which begs a question: if the RBA truly believes its forecasts, why didn’t it hike 50 basis points or more to get inflation back into the range sooner?
Also by the Kouk:
I was wrong in my recent analysis, thinking the RBA would be on hold after the December 2022 rate hike. It seemed the evidence of lower inflation from the end-2022 peak was overwhelming.
A rapid deceleration in economic growth, the vast array of leading indicators pointing to disinflation, the resolution of supply chain issues, a sharp fall in household wealth and the risks to Australia from a global economic hard landing were all there to form a view that the RBA would pause for now and sit back and watch inflation fall without the need to crack the economy with a sledgehammer.
And, at some level, even the RBA thinks this.
Governor Philip Lowe, in his press release announcing the rate hike, noted the following points - and I do acknowledge these are selective quotes:
Global inflation is “moderating in response to lower energy prices, the resolution of supply chain problems and the tightening of monetary policy”
“The outlook for the global economy remains subdued, with below-average growth expected this year and next”
“Inflation is expected to decline this year due to both global factors and slower growth in domestic demand”
“GDP growth is expected to slow to around 1.5 per cent over 2023 and 2024. The recovery in spending on services - following the lifting of COVID restrictions - has largely run its course and the tighter financial conditions will constrain spending more broadly.”
“Job vacancies and job ads are both at very high levels, but have declined a little recently. Many firms continue to experience difficulty hiring workers, although some report a recent easing in labour shortages. As economic growth slows, unemployment is expected to increase.”
“The board recognises that monetary policy operates with a lag and that the full effect of the cumulative increase in interest rates is yet to be felt in mortgage payments”
“Household balance sheets are also being affected by the decline in housing prices”
Those points cast a large and dark shadow over the latest rate hike and, indeed, the RBA statement that “further interest rate increases will be needed in the period ahead”.
If those comments from the RBA take a turn for the worse, then the Australian economy is set for a period of severe weakness.
Sober analysis of the economy before the most recent hike shows that the earlier interest rate hikes during 2022 are working. Retail sales volumes are falling, house prices are falling, dwelling construction is trending down, forward indicators of inflation are in free-fall, job vacancies and advertisements are falling and consumer sentiment is in the doldrums. The previous strength in business conditions has recently waned.
There is now a clear risk the RBA is overdoing it – in other words, too many hikes too late in the economic cycle when there are many signs of a slow-down and a free-fall in inflation.
The RBA is now tilting Australia towards a painful economic two years, where per-capita GDP stalls, wealth is eroded, the unemployment rate overshoots and - in a worst case - there is a recession.
We are not there yet but, with each hike, the risks are growing.
Sure, inflation will be even lower because of the February interest rate hike, and the RBA - under a different governor - no doubt, may look back at the end of the year and marvel at how it beat inflation. But, at a time when there is a clear slowdown in growth and the labour market is set to soften appreciably, it looks like the interest rate hike we did not need.
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