The wet track slowed the field in this year’s Melbourne Cup but unrelenting inflation and global uncertainty has led the Reserve Bank of Australia to maintain its record pace of tightening in the lead-up to the race that stops the nation.
It has increased official interest rates by another quarter of a percentage point to an almost decade high of 2.85 per cent.
“As is the case in most countries, inflation in Australia is too high,” said RBA governor Philip Lowe in announcing the cash rate increase about 30 minutes before the Cup line-up came out of the gates.
“Over the year to September, the CPI inflation rate was 7.3 per cent, the highest it has been in more than three decades.”
The first November rate hike since 2010 is the seventh consecutive increase in the cash rate, which has now risen by 2.75 percentage points since May.
“This has been necessary to establish a more sustainable balance of demand and supply in the Australian economy to help return inflation to target,” Lowe said.
And he warned that with inflation now forecast to peak higher at around 8 per cent later this year the RBA board expected to increase interest rates further over the period ahead.
Lowe said the priority was to return inflation to the 2 to 3 per cent range over time and the board would “do what is necessary to achieve this”.
“It is seeking to do this while keeping the economy on an even keel,” he said. “The path to achieving this balance remains a narrow one and it is clouded in uncertainty.”
Between November 2020 and May this year the official cash rate sat at a record low of 0.1 per cent before starting to rapidly ratchet up.
Most of the country’s leading economists have revised up their forecasts and now predict the cash rate will push beyond 3 per cent before the end of the year.
But what they still differ on is when it will top out, with at least one forecasting that the cash rate potentially will not peak until May next year.
Westpac chief economist Bill Evans estimates the cash rate will hit a peak of 3.85 per cent by the end of the first quarter of 2023. Meanwhile, Commonwealth Bank head of Australian economics Gareth Aird believes it will top out at 3.1 per cent in December, and ANZ economist David Plank is predicting rate hikes every month until May, lifting his forecast peak from 3.6 per cent to 3.85 per cent.
AMP chief economist Shane Oliver says the RBA’s bias “remains hawkish” and he beleives it will it will raise the cash rate by another 0.25 per cent next month, taking it to a peak of 3.1 per cent.
“While we have revised up our cash rate forecast to a peak of around 3.1 per cent, we remain of the view that the RBA won’t have to go much higher before demand cools enough to take pressure off inflation and keep inflation expectations down,” he said.
“By late next year or early 2024 we expect the RBA to start cutting rates. We would concede though that the risk to rates remains on the upside in the near term.”
Oliver said there was increasing evidence that rate hikes were starting to bite with housing-related indicators all very weak, consumer confidence remaining depressed, retail sales having been roughly flat in real terms over the last two months and some signs of slowing jobs growth.
“While inflation remains high and is still rising it is one of the last indicators to turn down in an economic downturn—so relying on the most recent inflation data to get a guide as to what future inflation will be is like driving using only the rear-vision mirror,” he said.
Lowe said the RBA was closely monitoring the global economy, household spending and wage and price-setting behaviour and how they respond to the tighter financial conditions.
“Price stability is a prerequisite for a strong economy and a sustained period of full employment.”
But, he added: “One source of uncertainty is the outlook for the global economy, which has deteriorated over recent months.”
Oxford Economics head of macroeconomic forecasting Sean Langcake said the worsening outlook for domestic and global GDP growth from three months ago would make the RBA’s task more difficult.
“As rates rise against the backdrop of weaker growth, the risks of overtightening and exacerbating the slowdown are growing,” he said.
“Moreover, household budgets will come under further pressure over the next 12 months as a large cohort of low-rate, fixed-term mortgage debt matures. Nevertheless, the RBA looks set to take further action to dampen demand growth.”
According to product comparison service Finder’s head of consumer research Graham Cooke, the latest cash rate hike meant Australian homeowners with a $500,000 mortgage would now be paying $815 more a month in repayments compared to just seven months ago.
“This seventh consecutive rate hike will be a bitter pill to swallow for many,” he said.
“The current series of rate hikes has added almost $10,000 to the annual cost of a $500,000 mortgage.”
More optimistically, aggregator Finsure Group’s chief executive Simon Bednar expects that despite rising inflation, after several successive rate increases the RBA could “play Santa Claus” and spare mortgage holders another hike when it meets in December.
“I don’t believe the RBA will do anything in December with Christmas looming,” Mr Bednar said. “There is also no RBA board meeting in January so mortgage holders may be given a two-month respite from rate increases.
“But with inflation continuing to surge around the world, the RBA may have to increase rates again in February, 2023.”
