The RBA’s decision on Tuesday to raise the cash rate target by 50bps to 0.85% came as a surprise to more than a few economists. It’s not that the economists did not expect a rise, it’s just most of them did not expect 50bps. On the other hand, prices of cash futures have been implying substantial rises in the cash rate for some time.
Here’s a selection of senior economists’ thoughts on the matter after the decision was made.
Bill Evans, Westpac Chief Economist
The key observation in the Governor’s statement was, “Inflation… is higher than earlier expected. Global factors account for much of the increase. But domestic factors are playing a role too, with capacity constraints in some sectors and the tight labour market contributing to upward pressure on prices.”
This statement clearly signals that the Bank now recognises that it has a significant challenge to contain inflation and today’s decision points to it now being prepared to act decisively. For that reason, we expect that the next move in July will also be a 50bp increase.
That would push the cash rate to 135bps. Having eliminated the emergency policy settings of 2020 at today’s meeting the next move would be to take back the 75bps of cuts we saw in 2019 when the Bank was frustrated at the consistently low inflation prints. Recall that the cash rate entered 2019 at 1.5%.
A slowdown in the pace of hikes in August can be expected but a response will still be necessary to the likely upside surprise on inflation for the June quarter with a further 25bp move required.
We expect further increases of 25bps will be required in November and December in response to another disturbing inflation print for the September quarter. 2022 would end with a cash rate of 2.1%, a policy stance that we would assess as in the contractionary zone.
David Plank, ANZ Head of Australian Economics
The RBA board tightened by 50bps at its June meeting, again surprising the consensus. The statement says explicitly that, “the Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead.” This is stronger than the language set out in May and suggests at least another 50bps increase is on the cards over the next few months.
August seems more likely than July, coming as it does after the June quarter CPI data and a couple more employment reports. As such, we think the RBA will hike by 25bps in July and then deliver a 50bp increase in August. One or two more rate hikes over the remainder of 2022 are possible if the data remain “resilient” despite all the various pressures facing households, something the RBA highlights as a risk. This will get the cash rate to around the bottom of the 2%-3% range for the neutral cash rate that Assistant Governor Kent highlighted in a recent speech by the end of the year.
Ivan Colhoun, NAB Chief Economist
For the second consecutive month, the Board surprised delivering a larger-than-expected rise, this time of 50bps. The large increase reflected the current very strong inflationary pressures in the economy, the still very low level of interest rates and the resilient economy no doubt confirmed to the RBA in the March quarter GDP figures.
The combination reinforced the view that the previous level of extraordinary monetary support was no longer necessary, while a further deterioration in the inflation outlook compared to even a month ago, on higher energy and electricity prices, meant a quicker move was required. Inflation features very prominently in the first two paragraphs.
Today’s release surprised us as we had expected the Bank to continue to move more moderately as the acceleration in wages growth remains modest and much of the inflationary pressure is unlikely to be persistent. That said, we agree that the RBA cash rate is some way from where it needs to be given the health of the labour market and the strength of cost pressures in the economy and that the previous level of monetary accommodation is no longer required. Our reading of the Statement suggests the RBA is now inclined to more quickly return monetary policy to a more neutral setting, which we see as in the 2%-2.5% range. Today’s move will mean that the interest sensitive sectors of the economy that have been buoyed by very supportive policy over the past two years, will experience greater pressure as is the design of tighter policy. We continue to think that cash rate pricing near 3.2% by Christmas and 3.85% in August next year, looks excessive.
George Tharenou, UBS economist
The RBA hiked more than we expected and their policy outlook was more hawkish. Rates are still “very low” and they expect “further steps in the process of normalising monetary conditions in Australia over the months ahead”. This indicates +50bps in July, post the minimum wage [decision], and potentially in August, post June quarter CPI [report]. Strangely, data moved broadly as we expected, but we got the RBA view wrong. We shift to our upside scenario for rates to rise towards 2.5%, which Lowe previously said is neutral.
We now expect +50bps in July, and +25bps in Aug/Sep/Oct/Nov to a peak of circa 2.35% by end-2022. This will likely see house prices drop greater than 10%, slamming consumer confidence, which will then probably see a sharp slowing in consumption. We also now expect rate cuts in 2H-2023 of 50bps to 1.85%. That said, if CPI remains high in 1H-2023 it’s possible the RBA keeps hiking, which would raise the risk of a hard-landing, given they’re “committed to doing what is necessary to ensure that inflation in Australia returns to target over time”. But we think a pause is more likely given “[t]he size and timing of future interest rate increases will be guided by the incoming data and …the outlook for inflation and the labour market”. We still think market pricing, which increased today towards circa 3.75%, if delivered, would likely crash housing and drive a recession.