Months ago, economists tipped rate cuts. Now they’re tipping a rate rise, as soon as next month. Has the RBA really been “late to the party” again?
Economists now think interest rates should rise, again, following the latest inflation number. Now this was a group, who for the last few months were saying rate rises might be over, so why should we believe them?
Maybe we shouldn’t, but we do, or at least we should treat their forecasts with a grain of salt. However, the problem is that the RBA gets influenced by this mob, which gives a lot of context to former Treasurer and Prime Minister Paul Keating’s RBA insult that our central bank “is always late to the party!”
With that he means the Reserve Bank board that decides what happens to the cash rate of interest has often raised too late or cut too late, implying they have a competence problem in knowing the Australian economy.
I understand that because our economy is a weird beast to interpret, with the latest economic curve ball to understand, the Budget’s impact on house prices and, in turn, consumer confidence and spending, still in its early days of impact.
And that’s why I would argue the RBA should wait and see how what has been predicted by bond market expert, Chris Joye, as potentially being the greatest fall in house prices in Australian history plays out.
Some economists say the next move up should happen next month, while others are in the November 3 camp, which will be Melbourne Cup day.
That makes sense to me because we get to see the September quarter CPI on October 28 and we would have had a chance to see the August and September unemployment numbers before they say at Flemington: “Go they’re racing!”
Those immortal words, which have been uttered since 1925, when the Cup had its first public radio broadcast, when the winner, significantly was a nag called Windbag.
At the risk of being called a shortsighted windbag, let’s look at the case for a rate rise ASAP.
Here’s the reasoning:
- Headline Consumer Price Index for inflation fell from 3.8% to 3.5% comparing June to July but economists tipped it was going to be 3.3%.
- Trimmed mean inflation, which the RBA thinks is more accurate, was 3.6% for the past 12 months but the forecast was 3.5%.
- The experts on the price of money or interest rates, the bond market, have changed the likelihood of a rate rise from 18% to 38%.
- A rate rise by year’s end has gone from 58% to 92%!
- Minutes from the July RBA board meeting showed “several members” were trigger happy thinking the central bank should pull the trigger on another rate rise.
The AFR calculated the impact of the cash rate going from 4.35% to 4.6%, would mean “a borrower with an $800,000 loan currently paying the average variable mortgage interest rate of 6.9%, that would add an extra $128 to monthly repayments, on top of the $376 increase wrought by the three previous rate rises.”
This would be the highest interest rate level in 15 years, which was the era of Kevin Rudd and Julia Gillard, and that might not surprise many Australians.
For those sweating on no rise in rates, Westpac’s chief economist, Luci Ellis, who was an ex-RBA heavyweight, told the AFR that a November rise isn’t yet her base case, but yesterday’s CPI does increase the chance of a rise on Cup Day.
The AFR captured what I think is the sensible view on what the RBA should do on rates.
“For the RBA to deliver the hike in September, you probably need the other data to beat [expectations],” said UBS chief economist George Tharenou, describing Wednesday’s inflation report as a “necessary but not sufficient condition” for another rate rise. He has tipped rates to rise in November.
Tharenou will be wrong with his November call if the real world effects of the Budget’s smashing of house prices turns out to be on par with the big calls that we’ll see the biggest home value slump ever.
If that plays out, we’ll be able to thank Jim Chalmers for stopping the RBA’s late-to-the-party rate rise, but we might not be too happy about what he has done to the value of our homes!
This is another reason why economics is called the dismal science.
