RBA refusing to play ball by hinting at interest rate hike

Listening to the RBA trying to tell you to prepare for an interest rate hike is a little like having your best friend and teammate try to tell you that you won’t be playing in the local sporting competition finals.

There’s a lot of preamble – “you really are improving as a player”; there’s plenty of supporting evidence –  “it’s just that someone has to miss out and for the sake of team balance…”

And there’s the final hammer blow after the long-winded, circuitous discussion. “Sorry – you’re not playing.”

The latest Reserve Bank of Australia Board Monetary Policy Meeting minutes encompass 3075 words.

But it’s the last three sentences of more than 30 paragraphs of economic analysis that finally makes the big unveiling that the listener probably doesn’t want to hear.

“Returning inflation to target was unlikely to be smooth and members recognised the considerable uncertainty about the outlook for both inflation and the labour market.

“Given this, members agreed it was difficult either to rule in or rule out future changes in the cash rate target.

“They reiterated their resolve to do what is necessary to return inflation to target, and to continue paying close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market.”

This is as close as the RBA has come to dropping borrowers from the team.

Higher wages, lower unemployment are a good thing, right?

The Board minutes always require a discerning interpretation of their equivalent of a coach’s pep talk, but these latest minutes, released Tuesday (21 May), are the strongest indicator yet that they see their bias tilting more towards a rate hike than what had been a highly anticipated cut.

The imminent stage three tax cuts did not score a mention but they must also be factored in to any discussion around interest rate forecasts. The higher after-tax incomes for every wage earner can only add to inflationary pressures.

Instead, the RBA looked under every other economic rock.

Internationally, the Board pointed out that inflation in advanced economies remained above central banks’ targets, despite substantial declines, and progress in lowering inflation appeared to have stalled.

In their words, “… more persistent services price inflation could delay the return of inflation to target, particularly in those countries where signs were emerging that disinflation in core goods prices may have run its course.”

Our export prospects remained largely the same but there was concern that global inflation would feed into Australia’s economy in the form of higher prices for imported goods.

Unlike most of us, the RBA sees higher wages and low unemployment as an imminent danger, not an indulgence to be welcomed.

All that extra money with workers leads to inflation, and therefore higher interest rates.

The picture domestically was not lending itself to delivering the final push required to get inflation past its final hurdle on the way down from 7.8 per cent in the latter quarter of 2022 to its preferred band of 2-3 per cent. It is now at 3.6 per cent but with upside pressures mounting again.

The RBA is still hoping to have inflation back within its target range by late 2025.

Domestically, consumers have been saving rather than spending but higher-than expected March quarter inflation figures and the risk of happier employees eventually living it up a little have the RBA nervous enough to suggest it had considered raising interest rates this month but held off.

The case for and against rate hikes and cuts

The risks at the moment appear on the upside for interest rates.

This is despite the Federal Budget releasing its own revised forecast of inflation falling below 3 per cent by the end of the year.

Services inflation remains sticky at 4.3 per cent year-on-year. Wages growth is taking hold, although anybody suggesting that if the Fair Work Commission gives aged and childcare workers a sizeable pay rise it will significantly impact inflation hasn’t lived on their salary. That money will be spent on necessities.

Then there’s those tax cuts taking effect from July.

And the RBA always has its eye on its overseas counterparts. They’ll be comforted in any temptation of an upwards move that their official cash rate of 4.35 per cent is below that of other comparable economies, including the European Central Bank at 4.5 per cent, Canada 5 per cent, UK at 5.25 per cent, US at 5.25-5.5 per cent and NZ at 5.5 per cent.

Josh Sale, Canstar’s Group Manager, Research, Ratings and Product Data, said the Federal Budget should provide immediate relief to power bills and potentially ease headline inflation in the short term, but that the medium-term effects, combined with the revised stage three tax cuts, could prove to be inflationary.

“Given the Reserve Bank’s preference to consider inflation excluding volatile items, for example energy, it is unlikely that the budget’s measures will contribute to lowering home loan interest rates in the short term.

“This is consistent with the federal government’s updated budget forecasts, which don’t anticipate a decrease in the cash rate until the middle of next year.”

The case for a rate cut hinges largely on retail sales continuing to fall, as they have done for the past seven quarters.

When it came to looking at the economic variables driving the RBA’s monetary policy decisions, the latest minutes point out that all the signs say rate rise, except for consumer spending.

On the rate rise side of the ledger, the Board reeled off in one paragraph upside risks that included sticky inflation, labour market pressures, and international inflation surprising on the upside.

“The key exception to this trend of stronger-than-expected data related to consumer spending in Australia, where the data had signalled ongoing weakness into 2024.”

It seems that if Australians are to have any hope of getting these previously expected rate cuts, they are going to have to put their wallets away.

Otherwise, the RBA is going to be having that awkward conversation with them about their spot on the team.