The relief many Australians felt when the Reserve Bank left its key interest rate unchanged might turn out to be fleeting unless a lot goes right with the economy in coming months.
Analysts were equivocal. The RBA’s rare inaction – only the second board meeting in 14 that it didn’t hike its cash rate – was variously a “hawkish pause” or a “coin-toss decision” (though not a stumping, perhaps fortuitously).
The RBA governor Philip Lowe’s 597-word accompanying statement didn’t hint at how close the central bank came to hiking again. We aren’t scheduled to hear from him (or other officials) until 12 July and we won’t see the minutes from Tuesday’s meeting until six days later.
Into that void will pour much speculation about what comes next – but the global scoreboard seems clear.
Australia was relatively late to lifting official interest rates, and borrowing costs remain below those of counterpart nations. Inflation remains too high almost everywhere and few will declare the RBA 4.1% cash rate is the peak.
Promising news is the RBA still expects the economy to keep growing, reinforcing views that a recession can be avoided.
Other developments may work in our favour too. Wage growth may not accelerate excessively and companies may not be overly greedy in what the Lowe dubs their “price-setting behaviour”.
Gone was the reference in Lowe’s June statement of “upside risks to the inflation outlook”. Downside perils, though, did get a look in, and explain why the RBA was willing to be patient.
Household consumption remains “a significant source of uncertainty” because nobody knows how borrowers will cope with mortgage repayments rising close to 50% – particularly when other hard-to-avoid costs are soaring.
The last couple of rate rises are still to be passed on to borrowers, while the rollover to higher variable rates from cheap fixed ones will accelerate this quarter, according to Brendan Rynne, KPMG’s chief economist.
“So the monetary policy tightening that has already occurred starts the process of converging more rapidly between those exposed to variable rates and those about to be,” Rynne said.
Housing will remain another bugbear for many. House prices are rising again, as the RBA noted, and Tuesday’s pause will probably incite buying activity at least until the rate axe falls again.
Renters will be hoping the absence of a rate hike removes an excuse for landlords to lift their rents. Data released by PropTrack on Wednesday found the national median advertised rental increased 2% during the June quarter to $520 a week. Rents are up 11.8% from a year earlier.
Median capital city rents increased by 5.8% in the quarter to reach $550, or “a staggering 17% compared to a year earlier”, as PropTrack put it.
Warren Hogan, an economist at Judo Bank who predicted Tuesday’s pause, reckons Australia’s rates remain “out of whack” with overseas counterparts. One reason is the surge of migration that will shoehorn in more than 700,000 people.
“It’s a running experiment to bring in a lot of people while you’re trying to slow the economy,” he says.
Hogan says the RBA will probably resume its rate rises at its 1 August meeting. How much higher they will need to go depends less on the June quarter inflation numbers than the September ones.
He says “powerful seasonal price increases” from energy to insurance are just kicking in now. Expect the debate over whether wage increases or profit gouging is driving inflation to flare again.
In other words, enjoy the reprieve while you can.
