RBA dangles rate hike threat after brief moment of relief
There was a double dose of good news from the Reserve Bank on Tuesday: not only were interest rates kept on hold as expected, but the central bank believes the inflation peak has passed and price rises will only slow for the rest of the year.
Not that you’d have guessed that from listening to Michele Bullock.
Interest rates, heading that way? Michele Bullock didn’t rule it out on Tuesday. Brent Lewin
The RBA governor made it clear a fourth rate hike of the year could be just one bad dose of inflation data away.
“The board will raise interest rates further if that is what is required to bring inflation down in a timely way,” she said.
“The board will be closely watching for evidence of upside risks to inflation materialising.”
To further emphasise the point, a rate hike was actively discussed by the RBA’s monetary policy board on Monday and Tuesday. A cut was not.
Bullock also said the pause was a case of wanting to wait to see exactly how the three rate cuts from the start of the year play out before making another move.
“This is very much a pause in the purest sense, with the door to another hike still open, but the RBA will be hoping it doesn’t need to walk through it,” eToro analyst Josh Gilbert said.
“This is still a central bank with its hand firmly on the rate lever,” he added.
“The board says it’s focused on making sure high inflation doesn’t become embedded.
“After three hikes this year that’s a clear signal it won’t hesitate to move again if the job isn’t done.”
All of the big four banks believe the RBA is done hiking, and that the next move for the cash rate will be a welcome cut.
However, traders are still largely pricing in one more increase in the next 12 months.
Consumer finance expert Joel Gibson said whichever way the RBA does go, it won’t remove the cost-of-living anvil that’s been weighing on many households.
“Home owners might be breathing a sigh of relief that rates haven’t gone up again today, but there’s not much to celebrate. Rates remain at their equal-highest level since 2011, and after three rises already this year, households are still feeling the squeeze,” he said.
“Someone with a $600,000 mortgage is paying around $272 more a month – or $3265 over the next year – and the big four banks aren’t expecting meaningful relief until 2027.
“The squeeze goes well beyond mortgages. Headline inflation is sitting at 3.8 per cent, with some of the biggest increases coming from the things households simply can’t avoid.”
While the RBA’s updated forecasts have both headline and core inflation easing to 3.6 and 3.3 per cent by the end of the year respectively, several factors could throw those expectations out, including volatile oil prices caused by the war in the Middle East.
“Those forecasts are uncertain, and we are conscious we may need to tighten further,” Bullock said.
“We’re aware of those risks but we already raised three times, and we will go again if we need to.
“And I think, personally, that it’s quite possible we might need to go. But we will wait and see what the data tells us.”
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