RBA’s 10th rate hike delivers killer blow to economy

Philip Lowe announced the 10th straight interest rate rise, despite acknowledging inflation had peaked. (Source: Getty)

The Reserve Bank (RBA) is clearly not content to keep monetary policy steady despite news of rising unemployment, a marked slowing in GDP, a decline in demand for workers, tepid growth in wages and a clear and unambiguous fall in inflation.

The RBA lifted interest rates for the 10th time in this cycle, with the cash rate hitting a decade high of 3.60 per cent.

If it was content or had any concern at all that these trends risked cascading the economy towards a hard landing or even a recession, it would not have hiked interest rates again.

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At 3.60 per cent, monetary policy settings are now restrictive. Interest rates were already high enough to deliver lower inflation when the RBA hiked them to 3.10 per cent in December 2022. Recent data on the economy’s performance confirmed this.

There now is no doubt 2023 will be a year of weak growth, rising unemployment and sharp falls in inflation. Even the RBA acknowledges this, which makes the rate hike all the more problematic.

In other words, are the recent interest rate hikes really needed?

Below is a stocktake on some of the key economic indicators, data and news that the RBA board had before it hiked interest rates again.

The lowdown on the slowdown

GDP growth has slowed through 2022. From a soggy 0.6 per cent rise in GDP in the March quarter of 2022, the next three quarters saw growth ease from 0.9 per cent, to 0.7 per cent, to just 0.5 per cent in the December quarter. In per-capita terms, GDP growth slowed to zero in the December quarter.

Employment has fallen in each of the past two months, with the level of employment down 11,500 in January after a fall of 20,000 in December.

The unemployment rate, which hit a 48-year low of 3.4 per cent in October 2022, edged up to 3.7 per cent in January. The level of job vacancies and advertisements reached a peak late in 2022, since which time a clear downtrend has emerged.

Wages growth, which the RBA expects to exceed 4 per cent in annual terms, has only edged up to 3.3 per cent. This poses no upside threat to future inflation. And this is before the wage-suppressing impact of a slower economy and mass immigration take effect.

Building approvals have fallen a stunning 48.8 per cent from the March-2021 peak, to be at the lowest level in more than a decade. Not only will this erode economic growth, it runs a risk of exacerbating the housing shortage, which is being driven by rapid population growth.

Retail sales fell 0.2 per cent in volume terms in the December quarter and in January, there was a small rebound from the 4.0 per cent fall in the month of December. The central bank’s internal card-spending data points to severe weakness in spending volumes through the March quarter.

Government demand is acting to dampen economic growth, with growth of just 0.2 per cent in each of the September and December quarters. The RBA is forecasting public demand to rise by just 0.1 per cent in 2023.

Inflation eased in January from what will obviously be a peak at the end of 2022. Globally, there are further signs of inflation pressures easing, not just in actual inflation data in all major economies, but also from commodity prices dropping and supply chain problems easing.

Where to now?

The RBA acknowledged much of the slowdown story, yet it moved interest rates to an extremely restrictive setting.

In the statement accompanying the interest rate, governor Philip Lowe noted: “The outlook for the global economy remains subdued, with below-average growth expected this year and next.

“Inflation has peaked in Australia. Growth in the Australian economy has slowed … [and], over the next couple of years, is expected to be below trend. As economic growth slows, unemployment is expected to increase.

“Wages growth is still consistent with the inflation target and recent data suggest a lower risk of a cycle in which prices and wages chase one another. 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.”

On these grounds alone, a credible economist could easily suggest that interest rates did not need to rise.

The RBA governor and his board thought otherwise.

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