He is clearly looking for a “seat belt” to ensure that the peak in inflation will occur in the December quarter and not dragged into next year.
In The Economist’s Word, the RBA’s statement will be seen as less “hawkish” than previous statements. In layman’s terms, it’s less acute about the need for further rate hikes, suggesting that there probably won’t be much more.
He is clearly looking for a “seat belt” to ensure that the peak in inflation will occur in the December quarter and not dragged into next year.
But economists have a lot of room for interpretation.
The RBA concluded its statement with a comment that it “remains firmly determined” to return inflation to its 2% to 3% target range. With inflation at 6.9%, it expects to raise rates further to achieve this outcome.
How many more rate hikes remain before this tightening cycle ends, and when, is now what markets and economists will be watching in the coming weeks.
The rapid rate rise took the cash rate from 0.1% to 3.1% in seven months. Under normal circumstances, this should be enough to dampen inflation at the knee. But these economic conditions are unusual.
First, many Australians borrow at very low fixed rates. The vast majority of those rates won’t be cut until next year, and some won’t need to be renegotiated until 2024.
Household spending has so far been resilient in the face of rising interest rates and high inflation.Credit:Louise Kennelly
These borrowers will not feel the pain of higher interest rates and can continue to consume goods and services accordingly. This explains why spending remains high despite rising costs of goods and services.
The immediate impact of rising interest rates is already evident. National home values have fallen more than 6 per cent this year. Sydney house prices have fallen 10.2 per cent since peaking in January and Melbourne prices have fallen 6.4 per cent since February.
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The RBA said household spending was expected to slow in the period ahead, but the timing and extent of the slowdown were uncertain.
It also acknowledged that most of the inflationary pressures Australians are feeling are imported. The RBA can do nothing about this or the deteriorating international economy.
It can only tread the narrow path of trying to curb inflation and keep the local economy growing. If successful, it will be a Christmas present from Lowe’s.
