RBA's dry commentary makes for juicy interest rate prediction

The Reserve Bank of Australia’s monthly Statement on Monetary Policy may make for a dry title but its speculation on where interest rates are heading is indeed juicy.

Borrowers who have had to dig up an extra $1,345 per month to service the average $598,000 mortgage should be drawing up their budgetary battle plans to contend with at least one more interest rate hike.

The big banks have actually moved beyond the RBA’s pace of rate hikes and wasted no time passing on the Melbourne Cup rate hike to their customers.

Reading the tea leaves of Friday’s (10 November) RBA statement and it would seem another rate hike is not too far off. Whether that comes in December or February next year (the RBA takes a break in January) is yet to be seen.

It’s case for a rate rise is simple; inflation is too high and not heading south as quickly as hoped, employment is expected to grow and fuel spending, wages growth is picking up and doing the same, and productivity needs to lift.

The RBA Board noted it was mindful that many households are facing a painful squeeze on their budgets, both from high inflation and the increase in mortgage rates to date but hinted those concerns were enough to overcome the effects of a strong economy.

The RBA is now forecasting inflation will remain at 4.5 per cent for 2023 – 0.6 per cent higher than it had hoped – but won’t fall below 3 per cent until the end of 2025. Annual inflation is 5.4 per cent in the 12 months to September, according to the ABS.

The RBA’s commentary on Friday was one-sided, with the risks to higher inflation greatly outweighing the factors that might otherwise lead to a lowering of interest rates.

“The weight of recent information suggests the risk of inflation remaining higher for longer has increased,” it said, in its strongest indication another rate hike was likely.

“The updated forecasts have inflation in Australia higher in the near term and taking a bit longer to return to the top of the Bank’s target range.

“The forecasts assume a path for the cash rate that is in line with financial market pricing and market economist expectations, and therefore incorporate some increase in the cash rate,” it said, pretty much sealing the deal.

“In addition, there is potential for further upside surprises to inflation, both because domestic inflationary pressures are persisting and because of external factors, such as potential global energy market disruptions and the prospect of higher food price inflation related to El Niño.”

Everything from the weather on the east coast to war in Europe and the Middle East, it seems, is working against a rate cut.

Rest of the world easing back on rate hikes

Australia’s latest interest rate hike throws it out of step with major international economies who have kept the pause button suppressed.

The world’s major central banks paused their interest rate hiking cycles in recent weeks and with data suggesting economies are softening, those markets are turning their attention to the first round of cuts.

The US Fed has held benchmark interest rates steady at a target range of 5.25 per cent-5.5 per cent for the second consecutive meeting after ending a string of 11 hikes in September.

The market is also pricing in almost 100 basis point of cuts for the European Central Bank by December 2024, with the first 25 basis point reduction is mostly priced in for April. The ECB is only confronting inflation in the euro zone at a two-year low of 2.9 per cent.

The Bank of England has kept its main policy rate unchanged at 5.25 per cent for a second consecutive meeting after ending a run of 14 straight hikes in September.

So why is Australia’s inflation and official cash rate so stubbornly high compared to those economies?

Record population growth is one factor that singles Australia out.

Stronger-than-expected population growth is helping to prop up business’ collective ability to raise prices at the same time as it is putting a lid on wages growth.

“Recent strong population growth has added to the supply of labour while also adding to aggregate demand,” the RBA said.

“Output growth this year has had a bit more momentum than was expected three months ago, which is partly the result of stronger-than-expected growth in population, as well as more strength in the growth of private and public investment.”

The RBA has regularly pointed out in its monthly missives that Australians saved plenty of money during Covid and got ahead with their mortgage payments.

But the toll is beginning to mount as homeowners facing a cost of living crunch and higher mortgage bills start to stagger.

SQM Research’s latest report reveals that as of October 2023, the number of residential properties being sold under distressed conditions in Australia has risen to 5,521. This reflects an increase of 5.2 per cent compared to the 5,246 distressed listings recorded in September 2023.

The uptick in distressed selling activity was primarily driven by increases in New South Wales (8.9 per cent), Western Australia (7.6 per cent) and a substantial 35 per cent increase in the Australian Capital Territory compared to the previous month.