Interest rates could edge higher to 5 per cent, economist warns
Recent commentary suggests the RBA may take a more aggressive stance on interest rates over coming months.
Comments last week from Governor Lowe suggest there could be further interest rate hikes in July and September, increasing the likelihood of the cash rate reaching around 5 per cent this year, according to AMP.
AMP deputy chief economist Diana Mousina said the RBA has grown more impatient waiting for inflation to slow.
“It has given up on the argument about the lagged impact of interest rate hikes which was an argument used to keep the cash rate steady in April,” said Ms Mousina.
“It also looks like the RBA is increasingly of the view that it needs to bring the cash rate more in line with its global peers.”
In a recent speech following the interest rate rise in June, RBA Governor Philip Lowe noted recent inflation readings have been the highest they’ve been for more than 30 years.
“Our job at the central bank is to make sure that this period of high inflation is only temporary. It is important that we are successful here,” Dr Lowe said speaking in a recent address at the Morgan Stanley Australia Summit.
“High inflation is corrosive and damages our economy. It erodes the value of money and savings, puts pressure on household budgets, makes it harder for businesses to plan and distorts investment.”
Dr Lowe said the return of inflation to target requires a more sustainable balance between aggregate demand and supply.
“The tool that the RBA has to achieve this balance is interest rates. I acknowledge that the use of this tool comes with complications. It’s effects are felt unevenly across the community, with rising interest rises causing significant financial pressure for some households but this unevenness is not a reason to avoid using the tool that we have,” he stated.
While there is evidence inflation peaked in late last year at 7.8 per cent and is tending lower, unit labour costs are still increasingly. Rents and electricity prices are also on the rise.
Dr Lowe stated while the board would like to preserve the gains in the labour market from the pandemic period, it “would not tolerate higher inflation persisting”.
“It is in Australia’s interest that we get on top of inflation and we do so before too long. The Board will do what is necessary to achieve that,” he stated.
Over the next few months RBA will be closely watching developments in the global economy, trends in household spending, unit labour costs and the outlook for inflation.
Ms Mousina said further interest rate rises mean GDP growth will further weaken, with AMP downgrading its growth forecasts for the next financial year. The bank now expects GDP growth to be below 1 per cent in both December and March 2024.
There are already signs the markets are starting to price in a higher risk of an Australian recession, with the Australian yield curve as measured by two year/10 year spread inverting over the past week, she said.
The four per cent increase in interest rates since May last year means is becoming much harder for the economy to remain on an “even keel” as the RBA and most are forecasting.
“[It] runs the real risk tipping the economy into a recession, which we assign a 50 per cent risk to in the next 12 months,” she said.
“There are already increasing signs that the economy is weakening – retail sales has slowed, the unemployment rate is rising, building construction is collapsing, and this is all occurring at a time that the inflation indicators are pointing down. We don’t think it is necessary to induce a recession to Australia to see the inflation outcomes the RBA would like.”
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