RBA cash rate day: Asset prices look sensitive to rate hikes — is there some pain on the way?
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If you’ve ever badly injured yourself, there’s a period – difficult to describe – where the shock won’t let the pain register: oh, you know it’s in the post – and maybe you’ve already seen the blood, or glimpsed a bone sticking out at an absurd angle – but the pain is off in the distance, coming closer, but still en route, still just theoretical and somehow, imaginary…
So. Big day for rates.
A generation of Australian home buyers and money borrowers have only ever known small and descending interest rates.
For 30 years, from circa late 1989 – around the release of Tim Burton’s Batman – to November 2020 Nicholas Cage’s masterpiece Jiu Jitsiu – the Reserve Bank of Australia went on something of an extended trimming spree – cutting the cash rate 50 damn times – from a now unimaginably high 17.5% to its current record low of 0.1%.
Money has certainly been delightfully cheap. Good home buying and business building conditions.
AMP Capital’s Shane Oliver is seeing interest rates rising from as early as June, the significance of that decision he measures in house prices, which Dr Shane reckons could fall between 4% and 10% thereafter.
Cutting straight to the nubbin – we might export a stack of commodities here in Morrison County but our wee Aussie economy is all about buying and selling homes and then pottering about with various expensive nesting activities. rising rates mean falling house prices, stifled borrowing, less investment.
The Philip Lowe’s team of enormous thinkers will be worried this could grind economic growth to a halt. And then they’d all be in trouble.
The RBA has been saving the day and making money cheaper for everyone for about as long as Home and Away has been exporting movie stars. It’s been nice, they’ve looked pretty sweet. But balancing inflation (in a post-pandemic globalised economy), with a best guesstimation of what rising rates could do to a domestically-obsessed domestic economy – well, that’s a crap gig for sure and good luck to Dr Lowe and the rest.
Skipping all the drama in between those 30 years on February 1, the RBA released the minutes from its most recent board meeting – signaling the end its of 15-month government bond-buying spree.
So with that out of the way, attention has naturally turned to when the RBA will start hiking rates.
Analyst consensus is that the Bank will start hiking in August, which is consistent with Governor Lowe’s recent comments that another “couple of CPIs would be good to see.” – or in the succinct words of independent economist Annette Beacher – “More data reports are needed to pull the trigger, as the RBA told us ad nauseam.”
The next CPI releases are due in late April and late July.
No need to wait that long for the CBA and its June faction.
The bank took one look at those minutes and changed their fast-forward take on rate increases, saying the first will now occur in June, having previously been part of the August faction.
CBA’s head of Australian economics Gareth Aird explains his economics team is, “very comfortable with our expectation that the Q1 22 underlying inflation data will be a lot stronger than the RBA’s forecast.” Adding the bank has it’s own, private surveys indicating, “the inflationary pulse has accelerated so far in 2022.”
Financial markets are pricing in a rate hike to 0.25% at the June meeting, while Capital Economics’ senior Japan, Australia & New Zealand economist, Marcel Thieliant, is also jumping ship to June.
“We now expect the RBA to start hiking in June in response to stubbornly high inflation. And while high household debt is a concern, the extreme tightness of the labour market coupled with continued loose fiscal policy means that rates may rise faster than most anticipate.”
Thieliant goes a few steps further saying while the RBA won’t mess with rates ahead of the federal election in May, his team is forecasting a hat-trick of rate hikes starting in June, then in July and again in August.
A factor here is the conflict in Ukraine is going to play havoc with already toppy commodity prices and that alone’ is going to spur inflation – and directly hurt our hip pockets as demand and uncertainty drive oil and gas prices higher.
“And we estimate that a sharp rise in energy prices will actually boost Australia’s export earnings more than its import bill. While the economic boost from higher export earnings would be small, the further rise in inflation would only make the RBA more eager to hike rates.”
There’s no doubt that price pressures are broadening, he adds.
And if anything, inflationary pressures will intensify further.
In the National Australia Bank’s most recent measure of business purchase costs touched new all-time high, the risk for the economy here is that consumer prices rise at an ever faster pace over this quarter.
And one thing the RBA can’t do is retrace it’s steps.
“Based on the strength we expect in Q1, and the outlook for rising inflation further ahead we think Bank will be convinced that it needs to start hiking sooner rather than later.”
Barclays Bank Singapore-based analyst Shreya Sodhani, says even with yesterday’s preliminary data releases, “we expect Q4 GDP to increase by 3.6% quarter on quarter – but see upside risks to our forecast
“We continue to expect the RBA to start to raise rates in August 2022.”
KPMG’s Sarah Hunter reckons the economy has shaken off the stank of Omicron, “and with the labour market continuing to tighten wages, growth is likely to lift (which in turn will feed into price inflation).
“We expect that the RBA will have enough confirmation of these trends by August, which will trigger rate lift off.”
Shane Oliver, AMP Capital’s chief economist and his own absolutely committed Elvis fan has been unwavering in his position that the RBA’s conditions for raising rates, should be a settled issue going into the September quarter.
“Unemployment is likely to have fallen below 4% by mid-year equating to “full employment”; wages growth is accelerating and is likely to be running at an annual pace of 3% or more by mid-year; underlying inflation is likely to continue running above the midpoint of the 2-3% target range.
“Our base case is for the first hike to be in August but there is a very high risk it will come in June if wages growth picks up as we expect, underlying inflation continues to surprise on the upside and unemployment continues to fall.”
And just quickly it’s worth getting Kyle Rodda’s take on what impact the war in Ukraine could have on monetary policy, even with the new indicators on inflation and spending, the big new mouth full for the Board to chew on since its last meeting is the Russian invasion of Ukraine.
“Directly, the Australian economy has few major trade links to either economy,” Rodda says.
“However, there may be positive and negative second order effects from the conflict on the Australian economy. Sanctions on Russia may boost exports of commodities like wheat and gas, amongst others, on the one hand.”
“But on the other, the impact from a protracted and disruptive war could be higher costs across the globe and hotter inflation. Although the outlook for the skirmish remains unclear, the RBA’s view on how it could affect policy will be pertinent for market expectations,” Rodda said.