The RBA would be ‘nuts’ to raise rates in June, unless the Board wants a recession.
In a better world, I can’t use the N-word, not even for minority supportive reasons. While I respect that, I’m bemused that African or black Americans freely use the N-word and no one with authority seems keen to cancel these insulters, who often are ‘stars’ in all sorts of media. Jews tell Jewish jokes, which others would be wise not to copy, and other races/religions get a free ticket to bag each other. Fortunately, economists, accountants and politicians are fair game, and no one wants to cancel anyone who tells it as it is when it comes to this lot.
As a former academic economist, I can use the E-word for economists who I rate highly and the D-word for the dunces in our fraternity, who screw up big time.
I won’t name past dunces because running the RBA isn’t an easy job, but it is a million dollar plus gig, so we should have high expectations and be cranky when they get it wrong.
With all this in mind, I critically look towards Tuesday this week and wonder if the Reserve Bank falls in line with the call of the chief economist of the NAB, Sally Auld, who last week declared: “We no longer expect the RBA to hike by 25bp in August, and now see the cash rate peaking at the current rate of 4.35% for the cycle.”
But wait there’s more, and it gets better.
“The next move in the cash rate is likely to be down, but the timing is uncertain. To highlight shifting risks to the RBA outlook, we have brought forward our expected easing from the second half of 2027 to the second quarter of 2027 – which now sees the cash rate end 2027 at 3.6%.”
To put this in ‘normal person’ language, the NAB economics team sees the cash rate start falling from April to July next year and it drops from the current 4.35% to 3.6%, which means a 0.75% cut.
Undoubtedly, like other economists, Auld would have noted the following negatives for our economy:
- Three rate rises since February this year.
- The petrol price spike and hit on household budgets because of the Iran war, which is akin to at least another rate rise.
- The Budget’s impacts on investors, business owners, along with the wealth effects, which don’t look positive for anyone who was spending because they had a valuable home, whose price was seemingly always rising. Reports of an expected 10% fall in house prices, thanks to the Budget, can’t be great for the confidence of these would-be consumers, investors and business owners. (Note, many business loans are linked to the value of the home owned by the business borrower.)
- The first quarter GDP growth this year came in less than expected, which wasn’t a positive revelation.
- NAB’s own business survey added to the negativity, such that NAB says: “Should activity data weaken more quickly than anticipated, the RBA will cut earlier than we currently forecast.”
- Meanwhile, Westpac’ s consumer sentiment survey backs those calling for an end to rate hikes, with Aussies as negative about consuming goods and services as they were during the pandemic! This is how the Westpac economics team saw the latest reading on consumer confidence: “Sentiment slipped back to historic lows in June, pessimists outnumbering optimists by around 20% again. Consumers are bracing for more bad news on the financial front and getting more unsettled about the housing market.”
All this screams that the RBA would be ‘nuts’ to raise rates in June, unless the board wanted a recession. It makes perfect sense for Governor Michele Bullock to say that her Board has seen what I’ve put on show above and that it justifies keeping rates on hold in June.
While she could easily say that the big watch will be on future inflation readings, she also should say that if the CPI is saying that any bigger-than-wanted rises in prices is more caused by the Iran war petrol price effects rather than over-confident, big-spending Aussies, then rate rises should be done and dusted.
It’s OK for Bullock to warn us to stop spending or else. However, her Board must understand that interest rate-rising to influence an economy is an unprecise science, so we don’t need scaredy cat economists or hubris-loaded RBA public servants erring on the side of excessive rate rises.
There are Australians with mortgages, businesses and God damn it, lives that are inextricably connected to borrowing that the RBA pleaded with us to do when the economy hit the skids in the Covid lockdowns.
The RBA must understand that when it talks tough or when it raises rates too many times, risk-averse banking executives prioritise the bottom line of their beloved bank employers over the personal economics of the customers they seduced with caring ads. So, they tighten the screws on these business borrowers and mortgagees.
While I’m not in the “we’re heading for a recession” camp, if the RBA overplays its hand, then Governor Bullock might end up with an R-word she wouldn’t like to see on her publicly exposed and referred to CV.
