Australian borrowers could be facing another interest rate increase, with Reserve Bank officials warning that inflationary pressures may be stronger than the latest data suggests.
Reserve Bank of Australia (RBA) assistant governor Sarah Hunter said interest rates remained the most powerful tool available to influence economic activity.
“We use interest rates because they get into everywhere, they get into all the nooks and crannies, eventually they’ll have an impact on all parts of the economy,” Dr Hunter said.
Her comments come as the RBA continues to raise concerns about Australia’s weak productivity, slowing economic growth and the challenges of managing both domestic and international inflationary pressures.
“Capacity pressures are manifesting as inflation, we know that’s happening,” Dr Hunter warned.
At the same time, economic growth slowed during the first half of the year, while the housing market has entered a cyclical downturn that could further weigh on activity.
“Growth has also slowed down in the first half of the year; we were expecting that. The housing market has now gone into a cyclical downturn and that’s going to dampen activity into the future,” she said.
Inflation Remains the Key Concern
Although Dr Hunter provides economic analysis and advice to the RBA’s monetary policy board rather than sitting on the board herself, she said inflation remained a major focus for policymakers.
“Even though they didn’t hike the cash rate in August they are still very concerned about inflation and we think all the risks are skewed to the upside,” she said.
An upside risk means inflation could prove higher than current statistics indicate, creating a difficult challenge for policymakers as they prepare to make their next interest rate decision.
The board will meet next Tuesday with the latest available inflation figures covering July. August inflation data, which could be particularly important for the RBA’s forecasts, will not be released until September 30 — one day after the next cash rate decision.
That leaves policymakers having to make their decision without the latest monthly inflation reading.
While three of Australia’s four major banks, along with several economists, expect the RBA to leave rates unchanged until it has access to the newer data, financial markets were pricing in an 88 per cent probability of a rate increase on Tuesday.
If rates rise, it would take borrowing costs to their highest level in almost 15 years.
“The board have been clear they will definitely be considering either or not they have to hike the cash rate [next week],” Dr Hunter said.
“We’ll have to see what happens, but obviously we want to get inflation down.”
Borrowers Face Another Potential Increase
Around one-third of Australians have mortgages, meaning another cash rate increase could result in higher minimum repayments for borrowers.
It would also mark the fourth increase in repayments this year for many households if lenders pass the rise through to mortgage rates.
Dr Hunter acknowledged that interest rate changes affect Australians differently, depending on their financial circumstances.
“There are different groups that get impacted quite differently by rates when we change them,” she said.
She also suggested Australians may need to become more accustomed to economic uncertainty in the coming years.
“It feels like in the next few years we’ve probably got to learn how to get a bit more comfortable with uncertainty. That’s really tough,” she said.
RBA Governor Reinforces Inflation Warning
RBA Governor Michele Bullock expressed similar concerns during a separate appearance at a Committee for Economic Development of Australia event in Sydney on Tuesday.
She warned that monetary policy needed to be carefully calibrated to prevent inflationary pressures from becoming entrenched.
“We need to be very careful to ensure that [monetary] policy is set in a way that minimises the second-round and indirect effects which might perpetuate ongoing inflation,” Ms Bullock said.
“Monetary policy really just needs to continue to focus on making sure that we limit indirect effects and we try to keep inflation expectations anchored.”
The RBA’s most recent forecasts, released in August, offered some improvement in the outlook, with the bank expecting inflation to return to its 2–3 per cent target range later next year.
However, underlying inflation remains elevated.
The RBA closely watches the trimmed mean measure, which removes some of the most volatile price movements to provide a clearer picture of underlying inflation. Australian Bureau of Statistics figures showed trimmed mean inflation at 3.6 per cent in both the 12 months to June and the 12 months to July.
The higher-than-expected July figure has kept the possibility of further interest rate increases on the table, with policymakers looking for clearer evidence that inflation is cooling.
More Rate Rises Still Possible
Dr Hunter said the ultimate goal was for inflation to become less prominent in the everyday economic landscape.
“What we really want is to get to a point where [inflation] disappears into the background, so you just don’t have to think about it, that’s what we’re aiming for,” she said.
The RBA has already delivered three cash rate increases, which Dr Hunter said were helping to slow economic activity.
“We think that as we’ve put three cash rate hikes through already and that’s helping to slow things down, and that’s what we hope is going to happen over the next couple of years,” she said.
However, she acknowledged another increase could still be necessary.
“It might be the case that the board feel they have to raise the cash rate again to slow the economy down a bit more.”
If the RBA does increase the cash rate at its next meeting, the rate is expected to reach 4.6 per cent.
For Governor Bullock, maintaining public confidence that inflation will eventually return to target is also critical.
“We need people to understand what inflation is and how we’re trying to bring it down and be convinced that we are going to bring it down,” she said.
“If they aren’t convinced of that, then it will perpetuate itself.”
