RBA reveals March rate decision

In his statement on the central bank’s monetary policy decision, RBA governor Philip Lowe nodded to the economic impacts of Russia’s invasion of Ukraine, with the board carefully watching how inflation moves as a result.

Prior to the announcement on Tuesday afternoon, market players had speculated the Ukraine crisis would impact the central bank’s decision-making.

“The global economy is continuing to recover from the pandemic. However, the war in Ukraine is a major new source of uncertainty,” Dr Lowe commented.

“Inflation in parts of the world has increased sharply due to large increases in energy prices and disruptions to supply chains at a time of strong demand. The prices of many commodities have increased further due to the war in Ukraine.”

The RBA has aimed for annual inflation to be “sustainably” within the 2 to 3 per cent range, before it hikes up the cash rate.

For the central bank to be convinced that inflation is sustainably within the target range, annual wages growth will also need to rise above 3 per cent.

But annual underlying inflation has picked up more quickly than the RBA previously forecast, with its central scenario projecting a further rise in coming quarters to around 3.25 per cent, before declining to 2.75 per cent over 2023.

Supply-side problems are expected to resolve and consumption patterns are tipped to normalise next year.

Dr Lowe stated that while inflation has lifted, it is “too early to conclude it is sustainably within the target range”.

“There are uncertainties about how persistent the pick-up in inflation will be given recent developments in global energy markets and ongoing supply-side problems,” he said.  

“At the same time, wages growth remains modest and it is likely to be some time yet before growth in labour costs is at a rate consistent with inflation being sustainably at target. The board is prepared to be patient as it monitors how the various factors affecting inflation in Australia evolve.”

Recent data from the Australian Bureau of Statistics (ABS) showed wages rose by 0.7 per cent in the three months to December, with an annual growth rate of 2.3 per cent.

Mortgage Choice national sales director David Zammit commented strong economic conditions have set the stage for a rate hike later in the year, but the latest wages data did not support a rise in March.

“The wage price index revealed a modest growth in wages in the December 2021 quarter, but not enough to prompt the Reserve Bank to bring forward a rate increase,” Mr Zammit said.

Meanwhile, Bluestone economist Andrew Wilson has expressed doubts about a 2022 rise taking place altogether, stating the subdued wages movements had “stymied recent widespread predictions of imminent RBA rate rises.”

“With real wages growth falling for the first time since 2014 and the clear prospect of further declines through higher inflation (exacerbated by current international geopolitical turmoil), the last thing the economy needs is higher interest rates - and the RBA knows it,” Dr Wilson said.

The RBA is also working to achieve its mandate of full employment. Unemployment is now around its lowest level since 2008, at 4.2 per cent.

The organisation’s central forecast is for the unemployment rate to fall to below 4 per cent later in the year and to remain below 4 per cent in 2023.

Meanwhile, Finsure managing director John Kolenda believes the RBA will “cautiously deliberate any move” until there is further clarity around the Ukraine war.

“Putin’s actions have shocked the world and moved the goalposts for the RBA which had been navigating its way through the economic rollercoaster of the COVID-19 pandemic,” Mr Kolenda said.

“Money markets had been forecasting the RBA would be lifting the current cash rate of 0.1 per cent around the middle of the year due to inflationary pressures but now the situation in Ukraine has changed everybody’s plans while the flood disaster in south-east Queensland and northern NSW will also have an impact on the central bank’s deliberations.”

Similarly, Harley Dale, chief economist at CreditorWatch commented the RBA is unlikely to budge in the current environment.

“Damaging economic and humanitarian consequences have yet to play out and discussion of petrol prices here in Australia hitting two dollars a litre won’t be lost on consumers,” Mr Dale said.

“Consumer confidence has already been trending down for nearly 12 months and supply chain issues associated with the crisis is likely to lead to a higher demand in groceries, sparked interest rates and steeper mortgage repayments.”

Mortgage brokers expect higher rates by end of 2022

A survey from platform HashChing has revealed most (75 per cent) of Australian mortgage brokers expect the cash rate to end the year at a higher level.

Around a third (36 per cent) of brokers predicted the rate would be 25 basis points higher, whereas 39 per cent tipped there would be a 50 basis point rise.

Mr Kolenda commented it is unlikely that the RBA will raise rates in the order of 25 to 50 basis points over a short period, before assessing the impacts of further hikes.

“It’s been more than 11 years since the RBA lifted rates and many mortgage holders are unaccustomed to rate increases,” he said.

“History has shown us that as soon as the RBA starts to increase rates we see an immediate impact on consumers as they become more cautious, which leads to a slow down across the economy.

“It is likely that the RBA will increase rates a few times from record lows before we see that impacting the general consumer spending habits.”

However, the HashChing poll showed rising rates are not expected to significantly hit the housing market.

More than half (58 per cent) said they were not concerned that rate rises predicted would stifle the property market boom, while one in five (20 per cent) voiced some concerns.

Arun Maharaj, chief executive of HashChing commented the RBA will be looking to tick off more data points “before pulling the trigger”, and it is likely to have less incentive with an election on the horizon.

“With this in mind, it’s easy to see why Australia’s brokers are predicting modest rises and low impact. It’s when we look into 2023 that I feel things will get less rosy,” he said.

The HashChing poll also showed almost half (47 per cent) of brokers expect housing to be a major election issue.

“If that comes true, perhaps all this speculation on interest rates is looking in the wrong direction,” Mr Maharaj commented.

“If the government (whichever that might be) is elected on a mandate of demand-stimulating policies, modest interest rate rises might not be the worst thing for the health of the overall market.”

The last rate movement took place in November 2020, when the RBA slashed it from 0.25 per cent and began broad quantitative easing.

[Related: Brokers encouraged to 'give a hand', as floods continue]