The RBA hikes rates again with more to go, but falling confidence and home prices will limit RBA tightening
Dr Shane Oliver – Head of Investment Strategy and Chief Economist, AMP Capital
– The RBA has hiked the cash rate again – by 0.5% taking it to 0.85% and continues to signal more rate hikes ahead.
– We expect the cash rate to rise to 1.5-2% by year-end and to peak at 2-2.5% by mid next year.
– Greater sensitivity to higher interest rates will cap how much the RBA ultimately needs to hike by well below market expectations for a cash rate of 4% or more.
– Falling home prices and very weak consumer confidence indicate RBA monetary tightening is already getting traction earlier than in past rate hiking cycles.
The RBA has increased its official cash rate by another 0.5% taking it to 0.85% for the second rate hike in this cycle. This was above market expectations. Our expectation was for a 0.4% hike with the risk that it would be 0.5%.
In justifying the move the RBA noted that: the economy is resilient; the labour market is strong with the unemployment rate falling to just 3.9%; the Bank’s business liaison continues to point to higher wages growth; and inflation is expected to increase even more than it expected a month ago with notably higher prices for electricity, gas and petrol.
The RBA’s move is consistent with the stepped up pace of tightening from central banks in New Zealand and Canada and likely soon in the US as they all try to get ahead of the surge in inflation and to contain inflation expectations. This and the low starting point explains why the 0.5% rate hike is the biggest in 22 years.
The RBA’s commentary remained hawkish reiterating that it will “do what is necessary” to return inflation to target and that this will likely require “further steps in the process of normalising monetary conditions” which in short means that more interest rate hikes are likely on the way.
Australian interest rates on the rise
Source: RBA, Bloomberg, AMP
Banks are likely to pass the RBA’s rate hike on in full to their variable rate customers and deposit rates will rise further. Fixed mortgage rates have already moved up in line with rising bond yields in anticipation of higher cash rates – more than doubling from record lows around 2% early last year.