WEEKLY E-MAIL

9 Jun 2023

THE RESERVE BANK RETAINS ITS MONETARY POLICY TIGHTENING BIAS

By James Malliaros

The Reserve Bank of Australia (RBA) caught financial markets somewhat off-guard in both May and June. After pausing in April, it unexpectedly increased the cash rate each month by 0.25% to the current level of 4.10%. This represented the 12th hike in 13 months and takes the cumulative increase to interest rates since the hiking cycle commenced to a full 4.00%.

The minutes of the RBA Board meetings revealed that while the arguments were “finely balanced”, the Board ultimately justified the rate hike in both months due to not enough significant moves downward and continued concerns on upside risks to inflation, the depreciation of the Australian dollar and house prices, which have continued to climb.

Over the last few months, the data flow has been mixed and inconclusive. First quarter 2023 wages data saw a 0.8% increase, slightly short of expectation. The headline unemployment rate rose by 0.2% to reach 3.7%, while employment levels remained largely unchanged. Furthermore, the monthly inflation gauge ticked up to 6.8%. The RBA statement pointed to persistent strong wages growth and unit labour costs as underlying drivers of some of this concern on upside inflation surprise, most likely referring to the recent Fair Work Australia announcement of an increase in the award wage by 5.75% and the national minimum wage by 8.65%, effective from 1 July.

The effect of the ongoing rises in interest rates is that households are due to feel the pinch of higher mortgage costs as early as the second half of 2023. The much talked about fixed rate mortgage cliff in Australia indicates that the RBA cash rate peak could coincide with the fixed-rate mortgage maturity peak, summarized in the charts below.

Source: LHS: ABS, RBA, Bloomberg, RHS: ANZ. CBA, NAB and Westpac Investor Presentations. As of 30 April 2023

There is a good chance that the RBA will most likely continue its hiking phase, right up to the time when the peak of fixed-rate maturities roll into higher variable rates. The majority of fixed rate mortgages were taken out during mid 2021 as the RBA had engaged in its ultra-low policy settings and Term Funding Facility, encouraging banks to offer cheap short-term funding, much of which was taken up by households. Many of those short-term agreements are due to roll off for the remaining parts of 2023, exactly the time the RBA is expected to peak its policy settings.

Unfortunately, the RBA’s main aim of bringing inflation down risks causing a significant slowdown in the economy. Given the chance that the RBA may need to hike further, there is an increased risk that Australia may have a harder landing. The narrow pathway to a soft landing is getting very narrow indeed. Ultimately, what the recent interest rate decisions have shown is that the RBA has become very data dependent, leaving the door firmly open to future increases.

Commonwealth Treasurer Jim Chalmers said the RBA’s decision to hike again is not a response to the government’s fiscal policy strategy, but he declined to offer justification for the RBA’s recent rate hikes, adding it was up to RBA governor Philip Lowe to explain the central bank’s rationale.

“The Reserve Bank’s job is to squash inflation without crashing the economy, and they will have lots of opportunities, of course, to explain and defend that decision that they’ve taken today,” Treasurer Chalmers said. “My job is different. I take responsibility for my part of managing the economy.”

James Malliaros
Senior Financial Planner
Certified Financial Planner®
SMSF Specialist Advisor™
Authorised Representative No. 291633

If you have any questions or comments, please email me at james@gfmwealth.com.au

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