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Shift in RBA language signals rate hike within months

April 7, 2022

The Reserve Bank of Australia has changed the wording of its interest rate outlook to indicate that interest rate hikes could be just a few months away. April cash rates were flat at a record low of 0.1%, but the words in RBA Governor Philip Lowe’s monthly statement are that the board is preparing to raise interest rates for the first time in more than a decade.

The Board wanted to see real evidence that inflation was sustainable within the 2% to 3% target range before raising interest rates,” Rowe said in a post-Board statement in April. “Over coming months, important additional evidence will be available to the Board on both inflation and the evolution of labour costs.

“The Board will assess this and other incoming information as its sets policy to support full employment in Australia and inflation outcomes consistent with the target.”

The removal of a key and recently repeated line, saying the board is “prepared to be patient” as it monitors inflation in Australia, will be viewed as potentially significant, PropTrack economist Paul Ryan said. 

“That may signal that they think they’re closer to the combination of factors that they are looking to see before they start a hiking cycle,” Mr Ryan said. 

“The RBA is waiting to see evidence of sustained demand in the economy consistent with inflation within its target over the medium run.”

With inflation shooting above target and unemployment at a 14-year low, wages growth will be a key piece of the puzzle. 

Mr Lowe said while wages growth has picked up, it’s only hovering at a similar level to before the pandemic.

“There are, however, some areas where larger wage increases are occurring,” he said. “Given the tightness of the labour market, a further pick-up in aggregate wages growth and broader measures of labour costs is in prospect.”

May meeting one to watch

Following the announcement, economists at ANZ and NAB brought forward their predictions on when the first rate hike would occur, now tipping a June liftoff. ANZ`s head of Australian economics, David Plank, said May also couldn’t be ruled out.

By then, the RBA will have new inflation data to consider with first quarter Consumer Price Index (CPI) data released at the end of April.

“While the Board will have the inflation data in time for the May meeting, it won’t have new information on labour costs until it meets in June,” Mr Plank said.

“A May rate hike should not be ruled out, however. A surge in core inflation in the Q1 CPI could leave the RBA thinking it has little choice but to move.”

Economists at CBA also expect the first interest rate increase in June, while Westpac is tipping August.

Mr Ryan said next month’s meeting will be noteworthy as the RBA also announces the latest economic forecasts in its Quarterly Monetary Policy Statement (SOMP).

“The RBA will almost certainly wait until a SOMP release to start that [rate hike] process so that they can explain exactly why they’re raising rates and how that relates to their forecast for the future,” he said.

After May, the RBA will also put out updated economic forecasts in August and November.

“Those are the three dates that the RBA would choose to embark on this hiking cycle, almost definitely,” Mr Ryan said.

“We’re bouncing between August and November. We’re not putting much stock in May given conditions” he said.

“August seems more likely given how strong inflation has been.”

Inflation psychology may be shifting

The next release of inflation data will take into account the severe floods along the east coast of Australia and the events that pushed up the war, food, fuel and housing costs in Ukraine. Initially, rising inflation was considered temporary, but Mr Rowe said changes in household “inflationary sentiment” could burn these increased costs.

Essentially, if households expect living costs to rise, it can act a bit like a self-fulfilling prophecy. Households may make purchases sooner than originally planned to avoid paying more, and workers may seek larger wage increases to compensate for higher inflation – in turn pushing up material costs as businesses offset increased labour costs.  

“The war in Ukraine and the sanctions against Russia have created a new supply shock that is pushing prices up, especially for commodities. This new supply shock will extend the period of inflation being above central banks’ targets,” Mr Lowe said in a speech last month.

“This runs the risk that the low-inflation psychology that has characterised many advanced economies over the past two decades starts to shift.

“If so, the higher inflation would be more persistent and broad-based, and require a larger monetary policy response.”

The RBA had already expected headline inflation to push above 4% in the coming months, even before the federal government’s pre-election budget was handed down last week.

Economists have warned the budget, which included a multi-billion-dollar cost-of-living support package, could drive up consumer spending at a time when inflation is already running well above the RBA’s target range.   

Mr Ryan said inflationary pressures caused by the budget would be a consideration for the RBA.

“They very much could have short term inflationary impacts so I can see people’s concern with that,” Mr Ryan said. 

“I think that is definitely a consideration for the RBA. Whether it brings forward their cash rate decision is a hard thing to judge.”

Underlying inflation, which excludes petrol, fruit and vegetable prices and strips out volatile price movements, is also tipped to run well above the RBA’s 2-3% target range over the coming quarters.

Housing double whammy

As inflation pressures drive up costs at the checkout, home loan borrowers are facing a double whammy budget hit when mortgage repayments rise.

A new survey by RateCity showed three in four home loan borrowers said they’d have to cut back on expenses if their mortgage costs rose by $300 per month, and one in seven said they would not be able to afford the higher repayments, even with cutbacks.

RateCity research director, Sally Tindall said people who overstretched themselves to get into the property market recently would be feeling the heat of the upcoming rate hikes.  

“While most Australians will be able to take these rate hikes on the chin, not everyone will be taking them in their stride,” Ms Tindall said.

For more information on financing and your property goals, speak to the experienced professionals at @realty finance at www.atrealtyfinance.com.au

Source: https://www.realestate.com.au/home-loans/news/shift-in-rba-language-signals-rate-hike-within-months?rsf=ps%3Afacebook%3Anews%3Aaa%3AHL&fbclid=IwAR1NgiExm8Jaw6UYMFq0JugHLc0W8JtXPqE4fL6ZK31DVRFNvYBDwzjIWRM