Threat of higher rates remains, but peak may be in sight

RBA under fire for May rate rise

The Reserve Bank is prepared to hike interest rates again in June, but has signalled mortgage bills may now be high enough to push inflation back down to its target.

Minutes from the RBA’s May meeting, published on Tuesday, revealed the decision earlier this month to hike rates another 0.25 percentage points to a decade-high 3.85 per cent was “finely balanced” amid easing inflation.

But central bankers decided to resume increasing mortgage bills after hitting pause in April to mitigate “upside risks” to the inflation outlook, including fast rising prices for essential services such as electricity, gas and rent.

“The information available over the prior month had confirmed that the labour market remained tight and that inflationary pressures were significant,” the RBA meeting minutes said.

The RBA minutes also revealed that the bank’s forecast for inflation to fall back to its target band of 2-3 per cent by mid-2025 assumed the cash rate would increase to 3.85 per cent anyway, signalling a potential pause at this point.

“Members noted that the forecasts presented at the meeting were predicated on a technical assumption for the path of the cash rate that involved one further increase,” the minutes said.

But whether rates need to rise again will be decided by upcoming data, particularly wages growth figures due on Wednesday. It will offer fresh insight into whether typical pay packets are chasing prices higher.

“Members discussed the importance of unit labour costs in determining inflation over the forecast period,” the minutes said.

“A rise in productivity growth would be needed to ensure consistency of the wages growth forecast with the Bank’s inflation target.”

The board maintained its guidance that further interest rate rises were still possible in coming months, with upcoming data on wages growth to provide key insights into where the central bank will land in June.

“Members also agreed that further increases in interest rates may still be required, but that this would depend on how the economy and inflation evolve,” they concluded.

Commonwealth Bank chief economist Gareth Aird said the RBA minutes suggested a pause in June, unless wages growth is surprisingly strong.

“At this stage we don’t consider the June board meeting ‘live’ and expect the cash rate to be left on hold,” he said on Tuesday.

“However, there is a risk that broad based strength in the upcoming data, particularly an upside surprise on the [first quarter of 2023] wage price index and labour force survey shifts the June board meeting to ‘live’”.

A confidence index, compiled each month by Westpac and the Melbourne Institute showed consumers have been uneasy since the May hike, as well as the federal budget.

The index fell 7.9 per cent to 79 points in May from 85.8 in April.

Westpac chief economist Bill Evans said the index had almost fallen back to “dismal levels” seen in March, when it recorded its lowest monthly reading since the pandemic kicked off in 2020.

While not necessarily damning of the budget, the index was a reflection of the limitations on the government to hand out more cost-of-living relief at a time of high inflation, Mr Evans said.

Consumer surveys also tended to dip before and after budgets, he noted.

While consumers remain lukewarm on the inflation and debt-constrained federal budget, the Labor government’s efforts to address fiscal issues has secured its triple-A credit rating assigned by Fitch Ratings.

The agency ticked off the federal government’s decision to bank most of the revenue gains from strong commodity prices and a robust labour market.

Early steps to improve structural budget pressures by reforming the NDIS and bringing in extra revenue were also noted, although the agency said more work was needed.

with AAP

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