'Time for RBA to hit the pause button'

Much attention in the media and around Australian barbecues over the past 10 months has been on the rapid rise of interest rates and the impact it is having on households.

It has been the fastest and largest rise in interest rates in our country’s history, but people often forget it followed a correspondingly rapid drop in interest rates to record lows to protect our economy during Covid.

The return to historical interest rate norms was always expected, but the speed at which it happened certainly caught most by surprise.

The increase in interest rates by the Reserve Bank was for one reason only; to combat the largest outbreak in inflation in more than 40 years. 

The Reserve Bank of Australia (RBA) left raising interest rates for too long. It should have raised rates slightly in late 2021 and therefore avoided the sharp, high increases that have eventuated.

But while everyone is carefully eyeing the inflationary figures and interest rates’ dampening impact on this economic scourge, the RBA must be incredibly careful that they do not also start to kill off our strong economy.

Sadly, the RBA does not work off speculation but hard figures.

For some time there have been signs that inflation was starting to come down and, in my opinion, they should have held back on the last two interest rate rises until they saw more statistical evidence of what was unfolding.

They now have that evidence, with two successive months of large declines in the consumer price index (CPI) as it has dropped from 8.4 per cent down to 6.8 per cent.

We are now unquestionably in a position that a pause is justified until we see what transpires with inflation over the next month or two while the official cash rate sits at 3.6 per cent.

Time for inflation target reassessment

Looking a little further out, if the trend line continues to soften inflation and we reach sub-5 per cent there will be an argument for a very modest reduction in interest rates and certainly when we get below 4 per cent for some more significant easing of interest rates.

We are now living in a new economic landscape and it may well be that the Reserve Bank’s target range for inflation of 2-3 per cent should be reviewed and recalibrated to perhaps somewhere between 2.5-3.5 per cent, which would now be a more appropriate setting.

In his latest speech, at the National Press Club in Canberra, RBA Governor Philip Lowe appeared set in his ways, though.

He defended its use of a narrow inflation band despite inflation rarely being within the target range since 2014.

Mr Lowe held to the bank’s forecast it would take until mid-2025 until inflation returned to its 2 to 3 per cent target — a principle it has had in place since the early 1990s.

“It provides a very strong anchor point,” Mr Lowe said.

“Just imagine we didn’t have a target now, how would we be explaining what we’re doing?

“At the moment the target is providing a strong anchor for expectations in the community (and) I hope you believe and understand inflation will return to the 2 to 3 per cent range.”

Rates peak may be time for property buyers to strike

It’s still too early to call but we may well be at the top of the interest rate cycle, or at worst see one more increase in May.

We could then see some easing in the second half of this year but most definitely as we enter 2024 in just nine months.

This will have ramifications for the real estate market.

Those who view beyond the present will see potential sellers holding off on sales until later this year or early next year, and buyers re-entering the market to capitalise before the rush of additional buyers enter the market.

It is no surprise we are seeing the rise in auction success rates around the country to levels similar to the boom of the Covid years. Undersupply and higher demand will just get worse.