RBA warning as rate hike expected within weeks
The Reserve Bank of Australia is now widely anticipated to hit Australians with another interest rate increase before the end of the year, with the bank warning high demand is weighing on inflation prospects.
Just when it looked like the RBA’s next move would be a rate cut, hotter-than-expected inflation in July has sparked widespread concern that hikes are well and truly back in the picture.
New data on Wednesday revealed the Consumer Price Index (CPI) rose 3.5% for the 12 months to July, taking it to the lowest level since the start of the Iran War in February.
While positive at first glance, the figure is skewed by the run off of electricity rebates and changes to fuel cost relief and is higher than the 3.3% economists had expected.
Trimmed mean inflation, which strips out the most volatile month-to-month prices, is relied on more heavily by the RBA for rate decisions and paints a grimmer picture.
It remains unchanged at 3.6% for a third month in a row, rather than having passed a clear peak as expected by the RBA in its forecasts earlier this year.
Concern that higher inflation may be becoming entrenched in Australia’s lacklustre economy is likely to push the bank to act quickly.
RBA governor Michele Bullock has reiterated in recent weeks that the door remains open for more hikes, adding long term high inflation will not be accepted and the board will look to act if upside risks materialise.
Three of Australia’s largest four home loan lenders have now changed their forecasts for interest rates off the back of Wednesday’s inflation data.
It’s unwelcome news for borrowers, with a standard rate hike adding around $120 per month to minimum repayments on a $750,000 mortgage.
ANZ and National Australia Bank now expect the cash rate to go up as soon as September, while Commonwealth Bank has predicted a rate hike for November.
Despite this, CBA head of Australian economics Belinda Allen warned the bank was not ruling out an additional hike beforehand.
“Our previous call for the RBA to remain on hold this year was based on the view that inflation would continue to ease as growth slowed,” she added.
“The evidence has grown that tighter monetary policy is needed in the Australian economy.”
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CBA head of Australian economics Belinda Allen says there could be two rate hikes by Christmas. Picture: Supplied
Deutsche Bank and UBS are among other lenders expecting imminent rate hikes in what has been a whiplash few weeks for borrowers that has also seen several lenders slash variable offerings.
Deloitte Access Economics partner Stephen Smith yesterday labelled the inflation findings “a hot mess”, warning the RBA “cannot ignore persistently strong inflation”.
Housing costs are continuing to be a large driver of price gains, coming in as the top contributor to CPI over July, thanks in large part to rising costs associated with new dwellings.
The figure does not include changes to home prices, instead including the cost of building a new home, changes in rent prices, and fluctuations in the cost of basic utilities.
Housing was the largest contributor to inflation in July. Picture: Getty
“New dwellings prices rose 5.7% in the 12 months to July as builders passed on higher costs for materials and labour,” Australian Bureau of Statistics head of price statistics Rachael McCririck said.
Another rate hike could mark a grim milestone for the nation, with a regular 0.25 percentage point increase pushing the cash rate to its highest level in 15 years.
“Given the acute focus on inflation in recent commentary, to not hike by the November meeting would be a surprise even if data continues to show a slowing economy,” Ms Allen said.
Growing expectations for a rate hike in the next few months have also coincided with a fresh look into how the RBA tries to understand inflation.
The Reserve Bank has said it will not hesitate to rase interest rates again if it deems it necessary. Picture: Hu Jingchen/Xinhua
In its latest bulletin on Thursday, the bank said it was scenario testing how wages, rent, import costs, taxes and rent prices were pulling through to increased costs for the general public.
The property market was central, with the bank noting dwelling rents had made a “sizeable and sustained contribution” to inflation since 2022.
“It reflects the lagged effects of tight conditions in rental markets, with housing demand rising,” it read. “The recent inflationary episode has coincided with a period of excess demand in the economy.”