To Cut or Not to Cut ? -RBA’s Next Move-

The discourse surrounding the RBA's next rate movement has decidedly split experts into two distinct camps. As the economic landscape evolves, the debate intensifies between those who advocate for a rate cut and others who foresee further hikes. Let's delve into both sides of this pivotal argument to gain a comprehensive understanding of their perspectives

The Cut Camp

Historic Inflation Combat: The RBA, in an unprecedented move, lifted the cash rate by a remarkable 4 percentage points since May 2022. This sharp rise was a direct response to battle the most severe inflation surge witnessed in several decades.

Economic Forecast

The looming shadows over economic activity combined with the slackening inflation pace suggest no immediate necessity for higher rates.

Mortgage Cliff

A staggering 800,000 fixed rate loans written at 2% are transitioning to variable rates, pegged around 6.5%, this year. Moreover, another 400,000 home loans are set to mature in 2024 and the years following. This imminent mortgage cliff is projected to significantly impact the property market, a major part of the Australian economy.

Retail Sector Downturn

Declining consumer demand has ignited the longest downturn in the retail sector since the global financial crisis, underlining the vulnerability of the economy. ANZ-observed Australian spending was down 10.4% y/y in the first 20 days of August. The pullback is being felt in the CBDs, with in-store spending down 12% y/y in the nation’s city centres.

The Hike Camp

Stubborn Inflation

Current inflation is hovering around 6%, a number that greatly overshadows the RBA's target band of 2% to 3%. This deviation from the goal might nudge the RBA towards further rate hikes.

Employment Numbers

The unemployment rate is currently cemented at an impressive low of 3.7%. To balance the economy, this rate needs to inch closer to a more sustainable 4.5-5%. With high employment, consumer demand remains buoyant, indirectly keeping prices of goods and services elevated and in turn, sustaining the inflation and interest rates.

Wage Growth

Anticipations are rife about an imminent acceleration in wage growth. Furthermore, there's limited optimism around productivity surging enough to ensure this wage growth doesn't fan the flames of inflation.

Sticky Service Inflation

Inflation within services, especially rent, is not showing any signs of abating. Such persistent inflation might necessitate higher interest rates to regulate and curb it.

Author's Perspective

It appears that the era of rate hikes might be drawing to a close, if not already at its conclusion. Now might be the opportune time for the RBA to maintain the high cash rate, possibly at around 4.1%, for the next 12 months. This would allow the economy to assimilate and react to the high rates.

The RBA's projections, released on August 4, 2023, suggest a lenient stance on achieving the inflation target, hinting at a willingness to wait it out. Excessive rate hikes from here on could heighten the risk of plummeting into a severe recession, which could endanger the Australian economy, potentially leading to a painstaking recovery that spans years.

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