Following a record period of more than ten years of falling interest rates, the RBA decided to increase official rates in May 2022 to counter surging, covid-related inflation.
The RBA last raised rates in November 2010, climbing by 0.25% to 4.75%, and commenced an easing cycle in November 2011 that bottomed out at just 0.1% in April 2022.
Since May, the RBA has increased official interest rates each month for six consecutive months, with unprecedented monthly rises of 0.5% over June, July, August and September.
The RBA however surprised observers by increasing rates by just 0.25% over October and followed up by another similar smaller-scale rise over November.
The current rate tightening cycle has been introduced by the RBA to counter sharply rising inflation, with the latest ABS September quarter headline annual growth rate of 7.3% - the highest recorded since the year ending the June quarter 1990.
Unprecedented government stimulus policies through 2020 to 2021 designed to offset the potential negative impact of covid lockdowns, created surging demand that far exceeded the capacity of supply, placing significant upward pressure on prices.
Higher interest rate policy is designed to quell demand, create a more balanced relationship with supply, place downward pressure on prices growth and avoid the economic nightmare of a wages-prices spiral.
The jeopardy of steeply rising interest rates however, is the risk that sharply reduced demand will create a severe economic downturn as seen in the early 1990’s.
Mindful of maintaining the strength of Australia’s booming economy currently producing record low monthly jobless rates, the RBA is now perhaps taking a more even-handed, watchful approach to monetary policy - mindful of the lagged impact of higher rates on the economy.
This may explain the lower rate increases over recent months, with the RBA keen to continue to fight inflation but also maintain a strong local economy and await clear signs of the results of this year’s sharp interest rate increases.
The outlook for inflation and interest rates may be improving with the international price of oil falling sharply over recent months and supply lines gradually adjusting to demand generally. US inflation has now fallen over consecutive months and now sits just above Australia’s rate.
Unlike other similar overseas economies, Australia’s inflation issues continue to reflect a mismatch between the demand for and the supply of goods, with higher services costs still accounting for a relatively small proportion of overall inflation.
This outcome largely reflects a relatively subdued response by local wages to higher prices due to Australia’s unique wage setting policies. Wages growth in the UK and the US by comparison is significantly higher resulting in higher prices for both goods and services as wages chase higher prices.
The previous peaks of RBA interest rate tightening cycles were - July 1996 7.5%, December 2000 6.25%, August 2008 7.25% and October 2011 4.75%.
Financial markets and banks are now predicting that the current rate tightening cycle will peak at around 3.75% in 2023 which will be well below the other peak results.
Here’s what Australia’s big four banks currently have to say about how we may see the cash rate move for the next few months:
ANZ: ANZ economist David Plank currently predicts that the cash rate will rise to a high of 3.85% by May 2023, based on the idea that the RBA will persist with a series of 0.25 basis point hikes each month.*
CommBank: CommBank economist Gareth Aird currently predicts that the cash rate will rise to a peak or “terminal rate” of 3.10% by December 2022, with this potentially being the point where rate rises will pause.*
NAB: NAB economist Alan Oster currently predicts that the cash rate will rise to a high of 3.60% by March 2023, and then remain stable for the rest of that year, before lowering again by March 2024.*
Westpac: Westpac chief economist Bill Evans currently predicts that the cash rate will be lifted to the level of 3.85% by 2023 in the face of strong inflation, with the potential for a rate cut by 2024.*
The RBA has also recently stated that it is prepared to keep rates unchanged for a period while it assesses the state of the economy and the inflation outlook – and that rates are not on a pre-set path.
Perhaps official interest rates may now be placed on hold sooner than expected.
*These figures were provided at the time of publication.
Dr Andrew Wilson - Chief Economist My Housing Market
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