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The Reserve Bank of Australia raised interest rates for the ninth consecutive time on Tuesday to the highest level since November 2012. The move to ra
[See the full post at: RBA Raises Rates to Ten Year High 3.35%, says Further Hikes Ahead]CBA raise #RBA terminal rate to 3.85% from 3.35%
Via Gareth Aird, head of Australian economics at CBA
The surprise was not in the decision, but rather the shift in tone and forward guidance in the Governor’s Statement
This change implies that the RBA Board has essentially made up their mind and intend to raise the cash rate further over coming months, if the economic data prints in line with their updated forecasts
The Reserve Bank of Australia’s governor Philip Lowe will face the Senate estimates committee this morning and is due to be grilled about interest rates.
RBA governor Philip Lowe has said the central bank may not be done with interest rate rises.
When the bank board lifted the cash rate to 3.35 per cent last week, it warned more rises were likely.
Financial markets now expect the cash rate to hit 4.1 per cent by August.
“There is a risk that we have not yet done enough with interest rates and spending is more resilient, and that inflation stays high,” Lowe said.
Inflation is currently 7.8 per cent, and the Reserve Bank wants it to be between 2-3 per cent.
Lowe explained why high inflation is bad:
If inflation stays high, it’s very damaging for the economy. It worsens income inequality. It makes it harder for businesses to plan, and erodes the value of people’s savings.
It’s corrosive to the economy and all the evidence is that if inflation stays high for too long, expectations adjust and that ultimately leads to higher interest rates and more unemployment.
It’s on 30 years since we had higher inflation, and many people have forgotten the really serious damage that does to people, to livelihoods, the functioning of the economy if it persists. And it leads to higher interest rates, and more unemployment, and we really want to avoid that.
The Reserve Bank expects wages to grow at their fastest rate in well over a decade this year, but governor Philip Lowe warned there is a risk people may start to want pay increases in line with inflation.
Wages are forecast to grow by 4.1 per cent by June, and 4.2 per cent by December.
Inflation is currently 7.8 per cent, and Lowe said there were concerns that people demand wage increases to match that.
“If we end up in the world I was describing before, where people link wage increases one-for-one with inflation, inflation will persist. And it’ll be more difficult. But at the moment, that’s not happening,” Lowe said.
“The enterprise agreements that have been signed over the past four or five months, have bigger wage increases this year, but then next year, they’re a bit lower again.”
Lowe said companies the bank spoke with through its business liaison program were saying that as well.
“They’re giving workers a bigger increase this year, but they’re saying to their workforce ‘well, next year, we’ve got to go back to something more modest’,” he said.
Supply shocks have accounted for at least half of the increase in Australian #inflation #RBA data shows.
– The US Fed has made it clear that this is portion beyond a CB’s control as has Gov Lowe. Simply they don’t control supply.
Westpac chief economist Bill Evans increased his forecast for the #RBA’s terminal rate to 4.1 per cent from 3.85 per cent.
“Our new forecasts now have Australia’s tightening cycle peaking around six weeks before the US cycle,” he said.
Investors ramped up Federal Reserve and RBA rate increases bets after another set of surprisingly strong US economic data.
Interbank futures are now pricing the RBA cash rate to top 4.4 per cent by September, and expect it to stay above 4 per cent until mid-2024, compared with 3.35 per cent now. They had implied the cash rate would peak as far as 3.6 per cent earlier this month. They ascribed a 92 per cent chance of a quarter-point lift at the RBA’s policy meeting next week and a small chance the RBA would hold steady.
In the US, futures expect the Fed funds rate to top 5.40 per cent by July, from 4.58 per cent now. The markets have also priced in rate increases over the next four meetings.
US consumer spending jumped 1.8 per cent last month, against forecasts of a 1.3 gain. The personal consumption expenditures (PCE) price index, tracked by the Fed for monetary policy, rose 0.6 per cent last month. It has accelerated 5.4 per cent in the 12 months through January.
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