Why the RBA is predicted to deliver a third straight interest rate hike this week | Interest rates
One economist calls this the “Hormuz hike.”
According to financial markets, there is an almost 80% chance that the Central Bank will raise interest rates for the third consecutive year on Tuesday.
For the approximately 3.6 million households paying off their mortgages, high interest rates are not always welcome. But this week’s rate hike could be particularly frustrating.
Faced with the crush of high oil prices and the wider cost of living, more than one homeowner will be wondering how paying more interest on their loans could do anything to fix the root cause of the latest pulse of inflation: the Middle East conflict.
Official figures released last week showed inflation rose by almost a point to 4.6% in March, the highest level in two and a half years. However, data showed that the more than 30 percent increase in oil prices during the month accounted for most of the inflation increase in the month.
Deutsche Bank’s chief economist Phil O’Donaghoe understands mortgage holders’ frustration.
“The irony is that there is nothing monetary policy can do about inflation in the next six months: it is all about the price of oil,” he says.
But O’Donaghoe, like most economists, still thinks a rate hike is the right thing to do.
From where? Because the RBA needs to send a message: “We will get inflation back under control.”
“If they continue next week with someone else [rate rise]This is particularly about showing the price and wage setters in the economy that they are serious about the inflation target,” says O’Donaghoe.
“And the best way to do that at this point is to raise rates.”
Robert Thompson, macro strategist at RBC Capital Markets, is quick to admit that the RBA can do nothing about the global oil supply shock. But Thompson, like many analysts, notes that inflation was “disturbingly high” even before the United States and Israel began bombing Iran in late February.
The central bank, whose confidence in fighting inflation is already under pressure, is “extra sensitive” to the knock-on effects of higher fuel costs on the rest of the economy.
The RBA’s nine-member monetary policy board voted to raise rates by the slimmest majority of just five at its last meeting in March.
“I’d be surprised if it was as close as the last one; I think it’s clearer,” Thompson says.
“The RBA has a tool and they need to use it, otherwise they run the risk of allowing inflation to rise significantly.”
The decrease in demand through interest rate increases makes it difficult for businesses to pass these costs on to their customers through higher prices. “I see it as a matter of sequencing: inflation here and now is something you have to get ahead of,” Thompson says.
“The growth shock will definitely happen, but it will come a little later and the RBA may respond to that later.”
Johnathan McMenamin, senior economist at Barrenjoey, says the RBA cannot simply stand back and let inflation recover on its own as the economic damage from the fuel crisis runs its course.
“Inflation will eventually kill itself by damaging real incomes and living standards to the point of slowing down. The central bank’s job is to maintain inflation expectations and correct the cycle,” says McMenamin.
“And if they suppress demand too much, they can go back and cut it. They can’t do anything.”
