Tuesday’s 50-basis-point (bp) rate hike was not unexpected, but it did send shockwaves through financial markets.
Shortly after the Reserve Bank of Australia (RBA) confirmed it was taking the official interest rate to 2.35 per cent, economist Shane Oliver notified the market that AMP would be revising its assessment of the cash rate peak from 2.6 per cent to 2.85 per cent.
Traders are currently split on the terminal rate, but the general expectation is that it will peak around 3.8 per cent in the September quarter next year.
For Dr Oliver, these expectations look too hawkish. If realised, he believes, the RBA would likely plunge the economy into recession and push home prices down by 30 per cent or higher.
In fact, Dr Oliver believes the central bank has already stepped into “dangerous” territory.
In an emailed statement to InvestorDaily, he said: “Rate hikes always impact with a lag and growth is likely to slow sharply ahead”.
“Given the lags, the RBA should now be starting to slow the pace of tightening. Failure to do so risks recession and overkill in taming inflation.”
In delivering Tuesday’s rate hike, RBA Governor Philip Lowe cited strong economic growth and a “very tight” labour market, noting that while the unemployment rate stood at 3.4 per cent in July, “a further decline” is likely in the months ahead.
But Dr Oliver warned that some of the data, the RBA appears to be blindly adhering to, is backward looking and does not indicate “where the economy is going”.
“Given long and variable lags in the way monetary tightening impacts the economy, there is a strong case for the RBA to now slow the pace of rate hikes in order to better assess their impact so far,” Dr Oliver said.
Referencing leading indicators, he said the RBA is already getting traction.
“Consumer confidence is at recessionary levels, housing indicators are falling sharply, and home prices are now also falling sharply which will depress consumer spending via a negative wealth effect,” Dr Oliver explained.
“So given the significant monetary policy tightening already seen, the reality that this will only hit the economy with a lag as it takes a few months for rate hikes to be passed on to borrowers and then for borrowers to adjust their spending, the big hit from falling real wages and the increasing weakness in leading indicators notably for consumer confidence and housing, there is a strong case for the RBA to slow the pace of tightening,” he continued.
And while Dr Olive is concerned with the RBA’s rapid and significant rate hikes, he does believe it is acutely aware of these issues.
The Governor’s comment that “higher interest rates are yet to be fully felt in mortgage payments”, along with its desire to “keep the economy on an even keel”, suggest to Dr Oliver that the bank may be moving towards some slowing in the pace of hikes in the months ahead.
Governor Lowe’s speech on Thursday will be watched closely for any signs of this.
Economy in the RBA’s hands
Last week, Commonwealth Bank (CBA) head of Australian economics, Gareth Aird, candidly assessed that the economy is now largely in the RBA’s hands.
“The rapid pace at which the RBA has tightened policy means there’s a degree to which the board is flying blind,” Mr Aird said.
CBA’s projections suggest that if the RBA pauses its tightening cycle once the cash rate reaches 2.60 per cent or 2.85 per cent, market data will indicate no need for further rate hikes.
“Indeed taking the cash rate higher would likely generate a hard landing in the economy,” warned Mr Aird.
Data from the Australian Bureau of Statistics confirmed on Wednesday that Australia’s GDP increased by 0.9 per cent in the June quarter. But while the economy is being celebrated for its robustness, some are warning that pockets of weakness are now expected to develop.
In fact, according to VanEck, the combination of headwinds could lead to a slowing of economic activity that could see Australia’s GDP growth fall below 3 per cent.
