Bendigo and Adelaide Bank: May Economic Update
The decision to resume lifting interest rates this month to 3.85% raises fresh questions as to whether the RBA will be able to engineer the soft landing it desires.
Exactly one year to the day the RBA kicked off the tightening cycle, Bendigo and Adelaide Bank Chief Economist David Robertson explores the prospects for the Australian economy.
Expectations for the RBA to lift rates were low ahead of the announcement following lower inflation numbers the week prior, leading many to speculate an extended pause could be on the cards. The statement that followed deliberations clarified its position.
“The RBA are determined to get inflation back near its target range ‘in a reasonable timeframe’ and their current forecasts aren’t seeing the decline in inflation quickly enough for their comfort,” Mr Robertson said.
“The cash rate is now back to levels not seen for more than a decade and while still not high in absolute terms, it is the pace of rate hikes that is the challenge, being the sharpest increase since the late 80s.
“The RBA reiterated their intention to ‘keep the economy on an even keel’ as they try to manage inflationary pressures,” Mr Robertson said.
With interest rates in the US, UK and New Zealand comparatively higher than in Australia, and in some cases substantially higher, the fallout is likely to be significant.
“These countries are facing hard landings as they attempt to tackle inflation. For Australia, the soft-landing scenario needs inflation to keep steadily moderating, and the RBA to be comfortable with the pace of this decline.
“The Aussie Dollar was also caught off-guard by the RBA decision, jumping a full cent after the news. While we expect the RBA to be on hold for some time - which should add stability, a weaker outlook for the US economy should translate to a mildly higher Aussie Dollar later in the year,” Mr Robertson said.
With ABS data showing that inflation has peaked, with headline CPI down to 1.4% for the first quarter of 2023, Mr Robertson noted the RBA did not consider this sufficient to continue holding rates with the prospect of cuts now even further away.
“Core inflation is back down to 1.2% for the quarter, so there has been progress, but in the RBA’s eyes, not progress enough.
“The annualised Consumer Price Index should steadily fall to around 3.5% by year end, but before we can get any relief via rate cuts, we will need to see core inflation at or below 3%, and this may be more than year away,” Mr Robertson said.
Mr Robertson said the recovery in house prices was likely temporary and said the Federal Budget would be keenly scrutinised for supply side measures to increase the availability of housing.
“Property markets recovered another 1% in April after the RBA pause a month ago. Housing and rental shortages together with a surge in population growth are expected to support residential property prices into next year, but the record peak to trough decline of 9% is still likely to extend into the teens,” Mr Robertson said.
Mr Robertson noted the unemployment rate is at an almost 50-year low, at 3.5%, and as a result of these rate rises, may face increasing upward pressure.
“As long as the cash rate isn’t increased any further this year, the RBA’s dual mandate of price stability and protecting jobs can be achieved, but a cash rate above 4% would make this outcome much less likely, with a sharper rise in unemployment,” Mr Robertson said.
“The jobless rate remains near a 50 year low at 3.5%, and the RBA are forecasting it to rise to 4.5% by mid-2025.
“However, like their suggestion from the pandemic era of no rate hikes until 2024, a sharper rise in unemployment may be much sooner than this anticipated timeline, so the path for inflation from here will be critical for the RBA’s policy decisions, and how they impact jobs,” Mr Robertson concluded.