AMP’s Shane Oliver on what the RBA’s interest rate hike means for Australia
AMP’s Shane Oliver on what the RBA’s interest rate hike means for Australia
The RBA’s decision to hike rates to 3.85% was no surprise with it being about 70% factored in by the money market and 22 of the 28 economists surveyed by Bloomberg expecting a hike. The decision to hike largely reflected the increase in annual inflation through the second half last year with quarterly trimmed mean (or underlying) inflation rising to 3.4%yoy and monthly trimmed mean inflation at 3.3%yoy, which is well above the 2-3% inflation target and was above the RBA’s forecast for 3.2%yoy according to AMP’s Dr Shane Oliver. This has led the RBA to conclude that the economy has less spare capacity than it previously thought.
RBA Governor Michele Bullock’s press conference comments basically reinforced these concerns and indicated caution regarding the outlook leaving the door wide open for further interest rate hikes if needed.
Despite assuming a higher Australian dollar and potential rate hikes, the RBA now sees inflation staying above target for longer and not really getting back to the midpoint of the inflation target until June 2028. This reflects its revised assessment that the economy has more capacity pressures than previously assessed – compared to say back in August last year when it saw inflation around target even with two or three more cuts! Of course, as the lagged impact of the forecast growth slowdown flows through inflation could conceivably fall below target in 2028-29 but that’s a long way off.
There is an old saying that rate hikes are like cockroaches – if you see one there is likely to be another! However, Oliver expects this to be a case of one and done because:
- Monthly trimmed mean inflation has progressively trended lower from 0.47%mom in July to 0.23%mom in December and slowed from 1%qoq in the September quarter to 0.9%qoq in the December quarter.
- Underlying inflation is expected to fall back to target this year.
- Business surveys show output price indicators around levels consistent with the inflation target.
- Consumer spending is likely to take a hit as Australia has swung quickly from rate cuts to hikes and mortgage stress is likely to remain high. For mortgage holders — who are far more responsive in their spending decisions to changes in their disposable income than outright homeowners — the RBA’s 0.25% hike will mean that their interest payments will start going back up again. For someone with a $660,000 average new mortgage this will mean roughly an extra $110 in interest payments a month or an extra $1300 a year. This will likely dent spending, particularly as expectations will now be for more hikes. Sure, those relying on bank deposits will be better off but household debt in Australia is almost double the value of household bank deposits.
- The rise in the Australian dollar is a defacto monetary tightening that will help lower imported inflation.
On balance we expect to see the cash rate remain at 3.85% for the remainder of the year, and we see money market expectations for two more rate hikes as being a bit too much.
Experts will be watching the country’s monthly inflation data to understand what is likely to happen next year. Another move in March seems unlikely given that the RBA has just moved but March quarter CPI data will be released in late April, ahead of the RBA’s May meeting and that’s likely be key. If it shows a further cooling in trimmed mean inflation as we expect then the RBA will likely hold.
While the return to rate hikes on the back of inflation running above target is disappointing, Oliver says he understands the RBA’s desire to get back on top of it and avoid perceptions that its tolerant of high inflation. As they say, “a stitch in time saves nine.”
Looking forward we are confident that underlying inflation will continue to fall back to target and so see the RBA remaining on hold for the remainder of the year, even though the risks are on the upside. The best thing Federal and state governments can do is to quickly reduce the level of public spending to free up more space for private sector spending.
For the economy the implications from the RBA’s rate hike with talk of more to come are as follows:
- Somewhat weaker economic growth from later this year.
- A bigger slowdown in home price growth – we were assuming home price growth this year of 5-7% but with rate hikes its possible we now see falls. Sure, home prices rose in 2023 despite rate hikes but that was because immigration surged. Roughly speaking each 0.25% rise in mortgage rates knocks about $10,000 off how much a person on average earnings can borrow to buy (and hence pay for) a home.
- The Aussie dollar is likely to continue to rise as the gap between Australian and US interest rates widens further.
See Oliver’s full insights column for the details, including all the graphs and charts.