Will the cash rate be raised to 4.35% next week? Is anyone considering the effect of this (and a hard hitting budget that promptly follows) would be a recession that we didn’t have to have?
Economists are tipping today’s Consumer Price Index will be so high that the Reserve Bank is very likely to raise the cash rate by 0.25% to 4.35% next week. The cause of the inflation spike is the Iran war’s impact on petrol prices and other related cost increases. If economists are right, then this rate rise will actually add to inflation.
The headline in today’s AFR has this additional ‘consumer killing’ rate rise as a foregone conclusion, saying that “War’s impact on inflation cements RBA’s rate rise.”
Given what most economists are saying, it does look on the money, despite the fact that any rate rise before the war is over and the Strait of Hormuz is open could prove to be a big mistake.
The next RBA meeting is this coming Tuesday May 5. I really hope a Trump-Iran peace deal is sealed by then, or at least a compromise on the passage of oil tankers through the closed 32 kilometre wide channel that’s holding the world economy to ransom.
Be clear on this: up until now, while this Middle East impasse is causing inflation and economic slowdowns, if it goes on too long, along with other economics commentators, I’ll be pulling out the R-word for recession. This was a point I made in yesterday’s column.
Last night on my Switzer TV program, I interviewed AMP’s Deputy Chief Economist Diana Mousina, who told me what to expect today.
Here’s a neat summary:
1. The headline inflation could be as high as 4.8% to 5% because of the 35% rise in petrol prices over March.
2. The more important number is the trimmed mean or core inflation that should come in at around 3%.
3. The petrol price increase is akin to a least one interest rate rise on household budgets.
Mousina thought the RBA would increase rates if the above happens. But when I pushed her about what she personally thinks the RBA should do, she opted for ‘do nothing in May’!
While economists in the modern world will tip what they expect the RBA to do, they seldom tell the RBA what it should do. Warren Hogan at Judo Bank did when the RBA started to cut rates in 2025. His view that rates should’ve been going up not down now looks like sound advice, given the central bank cut three times last year and by February had to start raising again.
It’s interesting that headlines never screamed: “RBA screws up, again!” It shows how well-behaved the media can be with august bodies such as our central bank.
And let me add, what central bankers do isn’t easy. But there can be times when they should be more careful rather than gung-ho on things like raising rates with wars going on, petrol prices smashing household budgets and having a negative impact on businesses dependent on fuel and oil-related products, such as fertilizers.
Here’s why I would hold rates, rather than hiking them next week, if the CPI reading today is 4.8% or higher:
1. The AFR reports that NAB economist Gareth Spence said: “Excluding the impact of petrol prices, inflation might have been a little softer than what the RBA had predicted.”
2. We’ve already had rate rises in February and March. Rate increases work with a lag, so you shouldn’t expect a fall in inflation until say September.
3. The 35% rise in petrol prices is like one or two interest rate rises and affects more than just the third of those Australians with a mortgage.
4. Effectively, it’s like we’ve had around four interest rate-like hits to our spending.
5. Unsurprisingly, the latest Westpac consumer sentiment reading fell 12.5% to 80.1, which is the biggest drop since Covid lockdowns came to town!
6. The latest NAB business confidence index was minus 29, down from zero, and also is the lowest reading since the pandemic crushed businesses!
Spence thinks the RBA board will be split on whether they should raise rates. I’m hoping good sense and good economics prevails.
And by the way, on Tuesday week, the Treasurer delivers the Budget and that’s also expected to be a hard-hitting, tax collecting affair. If the Budget follows a rate rise, this combination might even slow the economy down enough to cause a recession.
As Paul Keating explained in 1990, that will burn inflation out of the economy! But a hell of a lot of Aussies could end up out of work.
