RBA has questions to answer after latest rate hike
Nine rate hikes have now been implemented by the Reserve Bank (RBA) since May 2022, marking the most aggressive monetary tightening since at least the late 1980s.
The official rate set by the RBA is now 3.35 percent – 325 basis points up from the recent low of 0.1 percent, down from a year ago.
Surprisingly, the RBA is still concerned about inflation. In fact, current RBA forecasts assume that inflation will remain at or above the upper end of the 2% to 3% target range through mid-2025, raising a question: If the RBA really believes its forecasts, why didn’t it? did? not increase by 50 basis points or more to bring inflation back into range sooner?
From the kuk:
I was wrong in my recent analysis thinking the RBA would wait after the December 2022 rate hike. It seemed that the evidence of lower inflation from the late 2022 peak was overwhelming.
A rapid slowdown in economic growth, the plethora of leading indicators pointing to disinflation, the resolution of supply chain issues, a sharp decline in household wealth and the risks to Australia from a global economic hard landing were all reasons why the RBA would pause for now and sit back and watch inflation fall without having to crack the economy with a sledgehammer.
And on some level, even the RBA thinks so.
Governor Philip Lowe made the following points in his press release announcing the rate hike – and I recognize that these are selective quotes:
-
Global inflation eases “in response to lower energy prices, the resolution of supply chain issues and tightening monetary policy”
-
“The outlook for the global economy remains subdued, with below-average growth this year and next”
-
“Inflation is expected to ease this year due to global factors and slower domestic demand growth”
-
“GDP growth is expected to slow to around 1.5 percent in 2023 and 2024. The recovery in services spending – following the lifting of COVID restrictions – is largely complete and tighter financial conditions will constrain spending across the board.”
-
“Vacancies and job advertisements are both at a very high level, but have recently declined somewhat. Many companies continue to struggle to recruit workers, although some report recent easing of labor shortages. As economic growth slows, unemployment is expected to rise.”
-
“The Board recognizes that monetary policy is lagging and that the full impact of the accumulated rise in interest rates on mortgage payments has not yet been felt.”
-
“Household balance sheets are also being hit by the drop in property prices”
These points cast a large and dark shadow over the latest rate hike and indeed the RBA’s statement that “further rate hikes will be required in the period ahead”.
If these RBA comments take a turn for the worse, the Australian economy is in for a severe bout of weakness.
A sober analysis of the economy ahead of the latest rate hike shows that past rate hikes are working in 2022. Retail sales are falling, house prices are falling, housing construction is trending down, inflation forecasts are in freefall, job vacancies and advertising are down and consumer sentiment is down. The previous strength of the business situation has recently weakened.
There is now a clear risk that the RBA will overdo it – in other words, too many rate hikes too late in the economic cycle when there are many signs of a slowdown and free fall in inflation.
The RBA is now tipping Australia into two painful economic years of faltering GDP per capita, eroding wealth, overshooting unemployment and, worst-case scenarios, recession.
We haven’t reached our destination yet, but the risks increase with every hike.
Sure, inflation will be even lower because of February’s rate hike, and the RBA – under a different governor – will no doubt look back at the end of the year and marvel at how they beat inflation. But at a time when growth is clearly slowing and the labor market is likely to weaken noticeably, it looks like we didn’t need the rate hike.
Follow Yahoo Finance on Facebook, LinkedIn, Instagram And Twitterand subscribe to the free Fully Briefed daily newsletter.