Australian economy ‘largely in the RBA’s hands’, economists agree
At its September board meeting on Tuesday, the Reserve Bank is widely expected to raise the cash rate by 50 basis points (bp) to 2.35 per cent.
This fourth consecutive 50bp rate hike will also be the bank’s last, according to Commonwealth Bank head of Australian economics Gareth Aird, with a smaller lift of 25bp forecast for October.
In what will be a major week for financial market participants, the June quarter national accounts data will also be released on Wednesday, with the CBA forecasting a quarterly GDP increase of 0.8 per cent, primarily driven by household consumption, and an annual pace of 3.3 per cent.
According to Mr Aird, the Australian economy is now largely in the RBA’s hands, as recent economic data suggests the central bank could have a tough task normalising monetary conditions while keeping the economy on an “even keel” as previously indicated.
“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 in a recent note.
“More specifically, it is too early for tier 1 economic data, which includes unemployment, inflation, wages and GDP, to pick up the impact of the already delivered rate hikes.
“But key tier 2 data, which contains a lot of forward looking information, suggests the economy could slow quite materially from here, particularly given monetary policy is expected to be tightened further.”
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.
RBA to paint inflation as sole focus
Much like the CBA, ANZ is predicting GDP growth of 0.8 per cent on the quarter for the three months to June, along with yearly growth of 3.2 per cent.
“Net exports, household consumption and government spending are the main areas of strength,” said ANZ senior economist Felicity Emmett.
Turning to the RBA, ANZ’s head of Australian economics said the central bank will shortly confirm its sole focus is bringing inflation to target range. As evidence he pointed to Philip Lowe’s upcoming speech to the Anika Foundation, which has been retitled ‘Inflation and the monetary policy framework’, from the previous ‘Economic outlook and monetary policy’.
“Lowe on Thursday will emphasise that the central focus of the RBA is to bring inflation back to the target band, albeit over time rather than quickly,” David Plank said.
“He is likely to repeat the comment that the path for doing so while keeping the economy on an ‘even keel’ is a ‘narrow one.’ Failure to refer to keeping the economy on an even keel in some manner would be a hawkish shift.”
According to Mr Plank, Dr Lowe is also expected to indicate that, with policy now close to neutral, the RBA may consider hikes of less than 50bp at future meetings.
“In doing so, he would likely reiterate the post-meeting comment that ‘the size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market’,” he said.
“Still, a clear signal that the RBA may step down the size of hikes would be a dovish move.”
Westpac more optimistic
Westpac too voiced its support for a 50bp hike on Friday, but what set it apart from its peers is its more optimistic GDP growth expectations.
Namely, according to this big four bank, GDP will expand by 2 per cent in the June quarter – led by the consumer – bringing year-on-year growth to 4.5 per cent.
NAB on the other hand is slightly more careful, tipping quarterly GDP growth of 0.7 per cent, with year-on-year growth at 3.2 per cent.
AMP’s forecast for the June quarter national accounts includes an uptick in GDP of 0.7 per cent quarter-on-quarter and 3.3 per cent year-on-year driven by strong contributions from net exports and consumer spending and offset by weakness in housing and inventories.
Meanwhile, AMP chief economist Shane Oliver believes there is already a strong case for the RBA to slow the pace of tightening to give it more time to assess its work to date.
However, with the RBA having acknowledged inflation is likely to exceed previous expectations and reach 7.75 per cent in December, he too believes the governor will announce another 50bp hike on Tuesday.
Dr Oliver also joined the big four economists in predicting that the RBA governor could signal a possible slowdown in the pace of hikes given that downside risks to economic growth are rising.
“Governor Lowe’s speech on Thursday will be watched closely for clues on the monetary policy outlook and how big a risk the RBA is prepared to take on the growth and employment fronts in pursuing its inflation objective.”
AMP still sees the peak in the cash rate being 2.6 per cent later this year or early 2023, but Dr Oliver admitted that “given the ongoing strength in jobs and spending data there is an increasing risk that the RBA will tighten beyond this”.
Jon Bragg is a journalist for Momentum Media’s Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.