...its grim to hear market talk of multiple rate rises when not long ago, we were anticipating that the RBA could start cutting by mid year or at least Q3
...this is a test of what Michelle Bullock is made of,..it would be easy for her to follow market expectations to raise rates to avoid blame for what already seems 'too late too little' behind the curve. And the 1 July tax cuts would only add fuel to fire, so 1yr Aussie yield has moved up from 4.37pc to 4.52pc in a matter of 1 week.
...the problem is our economic growth is running below that of the US while our inflation is running higher....yet our interest rate is lower. Not a great position to be in for the RBA boss.
Multiple interest rate rises needed to quash inflation
John KehoeEconomics editor
Jun 27, 2024 – 5.08pm
Economists have warned there is a good chance that the Reserve Bank of Australia will need to raise interest rates multiple times to squash persistent inflation, jeopardising its hopes for a soft economic landing.
The hawkish warnings came as credit rating agency Fitch said that the share of borrowers falling behind on repaying their home loan had risen to the highest level in five years, with 30+ day mortgage arrears at 1.3 per cent in the first quarter of this year.
And a
two-day sell-off sparked by the inflation shock helped pull the Australian sharemarket back from its best return since 2021.
After the annual inflation rate in May
rose from 3.6 per cent to 4 per cent, JBWere chief investment officer Sally Auld said, “at best inflation is sticky, at worst it’s starting to accelerate”.
“I don’t think the RBA will take the pain just for one rate hike, they’re probably in it for two in quick succession because the [4.35 per cent] cash rate is not as restrictive as it needs to be,” she said.
“If the RBA takes the decision to hike, it’s basically an acknowledgement that we need a cash rate that is closer to 5 per cent to bring inflation down.”
Separate
analysis by The Australian Financial Review shows a single 0.25 of percentage point interest rate rise could cost some home borrowers at least one-third of the extra cash they will receive from tax cuts due to flow from July, undermining the Albanese government’s cost-of-living relief strategy.
Ms Auld said there was resilience in the economy from a low unemployment rate of 4 per cent, $23 billion of imminent annual income tax cuts and expansionary budgets from the federal and state governments.
But she said tighter monetary policy to tame inflation would lead to a longer period of weak economic growth and an unemployment rate of at least 5 per cent.
“As the governor hinted at her recent press conference, that would mean they are no longer talking about a ‘narrow path’ and that there will be a higher cost to achieve disinflation,” Ms Auld said.
Bullock warning
RBA governor Michele Bullock suggested at her press conference this month that while the RBA board was not keen to increase the 4.35 per cent cash rate,
the RBA was willing to if inflation was materially stronger than the bank’s forecast.
Ms Bullock said the “narrow path” to a soft economic landing was getting “narrower”, and repeatedly said the board was “alert” to upside risks on inflation.
“We need a lot to go our way if we’re going to bring inflation back down to the 2 to 3 per cent target range,” she said.
“The board does need to be confident that inflation is moving sustainably towards target, and it will do what is necessary to achieve that outcome.”
Approaching the August 5-6 RBA board meeting, the bank is facing higher-than-expected inflation for two straight quarters, and inflation that hasn’t really fallen since December.
Barrenjoey chief interest rate strategist Andrew Lilley said there was about a 50-50 chance of a rate rise in August, but people were underestimating the risk of more rate increases over coming quarters.
“The real thing that has been under considered is the chance the RBA does two or three rate hikes in the next six months,” he said.
“In the RBA’s modelling, a 25 basis point hike only reduces inflation by about 5 basis points year-on-year and that doesn’t solve the inflation problem.”
Antipodean Macro’s Justin Fabo, a former economist at Macquarie Group, the RBA and Treasury, said: “Unless there is a big change in the labour market, I don’t see how they can’t hike in August.
“Critics will say they can’t just do one because it’s fine-tuning, so they’ve got to be prepared to say they are willing do to more which can be pretty powerful.”
Mr Fabo forecasts the RBA’s preferred measure of underlying inflation to be 1 per cent in the three months to June 30, 0.2 of a percentage point above the RBA’s May forecast.
That would imply underlying inflation was running at an annualised rate of 4 per cent for the past six months.
For a borrower with a $1 million mortgage, a 0.25 of a percentage point rise at the RBA’s August meeting would add $164 in monthly payments, according to Compare the Market.
Two interest rate rises would cost more than an extra $320 a month, on top of the $2586 extra a $1 million borrower has been paying since May 2022.
Former
RBA board member Warwick McKibbin and Judo Bank chief economic adviser Warren Hogan have said for months that the RBA cash rate
needs to be closer to 5 per cent to reduce inflation back to the midpoint of the bank’s 2 to 3 per cent target.
Economists are split
More broadly, market economists and financial market participants are divided on the outlook for interest rates.
Money market traders are pricing in about a 40 per cent chance of a 0.25 of a percentage point rise in August and about a 60 per cent chance by September.
Westpac analysis last week found government budgets would add more than $50 billion of stimulus into the economy in the next 12 months thanks to growing deficits.
Stephen Anthony, principal of Macroeconomics Advisory, said: “We’ve got at least one more rate hike coming.
“The federal and state governments have not helped with their budget spending.
“The RBA has played a very measured game and has been behind the world, with policy that is not particularly tight.”
The RBA’s 4.35 per cent cash rate is lower than official policy interest rates in the United States (5.25 to 5.5 per cent), New Zealand (5.5 per cent), Britain (5.25 per cent) and Canada (4.75 per cent, previously 5 per cent).
Some economists, including former Labor minister Craig Emerson and former adviser to Labor prime minister Julia Gillard, Stephen Koukoulas, have repeatedly rejected calls for higher interest rates, arguing it would push up the unemployment rate.
