Australia set for fourth half-point rate hike

Central bank in race to cool prices

“The RBA would do some rate hikes and then wait to see what happens, but they’re just not giving themselves any time to watch the data.” Diana Mousina

SYDNEY: Australia’s central bank is banking on strong consumer demand to help the economy absorb its rapid interest rate increases, putting aside the threat of a broad-based housing downturn for the time being.

The Reserve Bank of Australia (RBA) will raise its overnight cash rate target by a half-percentage point to 2.35% at today’s meeting, according to 27 of 30 economists surveyed by Bloomberg, in what would be its fourth straight move of that size.

Standard Chartered Plc sees a 40 basispoint hike that would remove an anomaly created during the pandemic when rates were cut to a record-low 0.1%, while Bloomberg Economics and Barclays Plc see a quarter-point move.

Australian policymakers, like their global counterparts, are striving to prevent inflation spiralling out of control.

They anticipate that the A$10 trillion (US$6.8 trillion or RM30 trillion) housing market will avoid forced sales because many mortgage holders have made advance repayments and are able to meet their obligations due to high employment.

Typically, during tightening cycles, “the RBA will raise interest rates and then wait to see what happens, but they’re just not giving themselves any time to watch the data because they’re worried that inflation is too high,” said Diana Mousina, senior economist at AMP Capital Markets.

Consumer price growth in the second quarter was 6.1%, double the upper end of the RBA’S 2% to 3% target, and is expected to peak at just under 8% late this year.

RBA governor Philip Lowe will deliver an address on Thursday titled “Inflation and the Monetary Policy Framework.”

“The RBA has signalled it may now slow the pace of its tightening,” said Bloomberg Economics economist James Mcintyre.

“The central bank in August said it has no pre-set path for policy moves and we see a 25 basis-point hike this month,”

A combination of pandemic-era stimulus and unemployment of just 3.4% has unleashed a boom in household spending.

Retail sales surged 1.3% in July, and this, together with high export prices, is expected to fuel the economy’s expansion.

A private report yesterday showed Australian job advertisements reached a new high in August, signalling solid labour demand ahead.

All that suggests RBA rate hikes are yet to hit demand significantly. Gross domestic product likely rose 1% in the three months through June from the prior quarter and 3.5% from a year earlier, economists predicted ahead of data tomorrow.

Yet the property market is struggling to absorb the RBA’S 1.75 points of hikes in the four months since May, when the cash rate stood at 0.1%.

House prices fell in August at the fastest pace since 1983.

The concern is that the downturn will reverberate through the A$2.2 trillion (RM6.7 trillion) economy, with the nation’s households among the world’s most indebted.

RBA rate rises take about three months to flow through to households, says Commonwealth Bank of Australia, the nation’s largest lender. That suggests consumers are only now feeling the effects of

the initial hike. Also, about a third of mortgages are on fixed terms, further insulating them from tightening.

That helps explain why Australian consumers are still spending heavily.

“Many households with mortgages will need to adjust their spending patterns over the period ahead as the lagged impact of rate hikes negatively impacts their cash flow,” said Gareth Aird, head of Australia economics at CBA, which accounts for a quarter of Australia’s total mortgage market.

Aird pointed to forward-looking surveys that suggest “the economy could slow quite materially from here, particularly given monetary policy is expected to be tightened further.”

RBA policymakers are trying to engineer a soft landing while acknowledging that the path to cooler inflation and maintaining solid growth is a narrow one.

A Bloomberg survey showed the median estimate of economists was a 23% chance of recession over the next 12 months.

That’s one reason why AMP’S Mousina also sees the possibility that the RBA might opt for a smaller 40-basis-point hike today.

“That would help bring the cash rate back to a more normal level,” she said. “It would also indicate that the pace of tightening can slow down because we know in Australia that interest rate hikes tend to be more potent.”