While the Reserve Bank of Australia handed down a 10th consecutive rate rise on Tuesday, the extent of the interest rate carnage will depend on one key figure: Australia’s inflation rate.
In 49 days, when January’s Consumer Price Index (CPI) quarterly update is released by the Australian Bureau of Statistics, Australians will get a sense of whether the cash rate will finally settle, or continue rising.
Experts say there’s a number we should be looking out for.
As it currently stands, Australia’s CPI is at a 30-year high, reflecting an annual growth of 7.8 per cent for the December 2023 quarter.
Australia’s official cash rate (3.6 per cent) is also at its highest since June 2012, and 350 basis points more than it was less than a year ago in April 2022.
Although another rate increase, most likely of 25 basis points, has been forecast by most economists and analysts for April 2023, whether the cash rate will hit 4.1 per cent in May rests on January 2023’s quarterly CPI update.
On Tuesday, Governor Philip Lowe said the RBA board expected ‘further tightening of monetary policy’ however his wording was different to the language he used in his February statement. Picture: NCA NewsWire / Gary Ramage
Monash Business School’s Director of the Bachelor of International Business, Professor Mark Crosby, told NCA NewsWire that if the CPI remains the same, or only marginally decreases, households can more or less be certain of a 12th consecutive cash rate increase on May 2.
“That’s going to be the big issue in terms of whether they keep going or not,” he said.
“The monthly inflation numbers are coming down, but it’s the quarterly ones that are more reliable.”
A “significantly” lowered CPI under 7 per cent, or “hopefully” in the sixes, could see cash rate hikes stop in April. Early data is positive; the monthly CPI indicator for January reported that annual growth had decreased slightly to 7.6 per cent.
However, Prof Crosby says it’ll have to drop further to make a difference.
“If (the CPI is at) 7.6 per cent, they’re going to be worried, but it’s starting to show signs that it’s on a trend down,” said Prof Crosby.
“Three months is not a long time, but if it comes down from 7.8 to 7 per cent, I think that’ll be enough to say, ‘All right, let’s just see where inflation and the economy goes over the next two to three months.’
“The only lever they have to reduce interest rates is interest rates, and that’s their job.”
According to analysts from the big four banks, Westpac, ANZ and NAB believe the cash rate will peak at 4.1 per cent. The Commonwealth Bank meanwhile has tipped a 3.85 per cent high.
On Tuesday, Mr Lowe said the RBA Board expected “further tightening of monetary policy” however his wording was different to the language he used in his February statement.
Just four weeks ago, Mr Lowe wrote that “the board expects that further increases in interest rates will be needed over the months ahead”.
The subtext was that multiple rate hikes would be needed to curb the all important CPI figure.
Betashares chief economist David Bassanese said the language used by Mr Lowe was purposefully “open-ended”.
Mr Bassanese believes the RBA will enact one more 25 basis point increase in April, before the bank takes a pause.
“Last month they were still anticipating at least two more rate rises and they wanted to signal that to the market,” he said.
“Whereas this month’s statement basically tells us to be open to the idea that it may be one and done.”
Mr Bassanese said the ultimate goal of the RBA is still to bring down inflation, something which Mr Lowe himself said the RBA was “resolute in its determination” to do so.
“They’re going to err on the side of doing too much; the consequences of letting inflation becoming entrenched are more costly than overly tightening because they can always reverse course,” said Mr Bassanese.
“When dealing with uncertainty, the policy of least regret is to avoid doing something that would be the most costly outcome.
“At the moment, the most costly outcome would be doing too little, rather than doing too much.”
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