Has the RBA ‘gone too far’?

The Reserve Bank of Australia (RBA) increased the official cash rate this week, surprising many industry pundits and economists who had been predicting a continuation of the pause seen in April 2023.

The prediction for a hold was largely based on the March quarter consumer price index (CPI) data revealing inflation had begun to fall from its 33-year high peak, however, RBA governor Philip Lowe maintained that inflation at 7 per cent was “still too high”.

The May decision marked the 11th rate hike in a year, taking the cash rate from 3.60 per cent to 3.85 per cent.

Following the move, several economists and commentators have suggested that the RBA's decision may be a risk to the economy.

AMP Bank chief economist Shane Oliver had recognised that a further rate hike could be possible, but (along with three of the major banks) expected the RBA to pause.

Following Tuesday's rate decision, Mr Oliver stated that he was concerned the central bank has now “gone too far” and could risk a recession.

"We think that the RBA has done more than enough and we have reached the peak in rates. Continuing to raise rates from here adds to the rising risk of plunging the economy into a recession," Mr Oliver stated

While Mr Oliver agreed that inflation is too high and there are upside risks to wages growth, he noted “there’s a big tightening in the pipeline yet to fully feed through to the economy, and that’s going to cause a lot of pain through this year, particularly for households with a mortgage”.

“So, I don’t think they’re allowing enough time to let lags, or the lagged impact of past hikes, show up,” Mr Oliver added.

Speaking to Mortgage Business's sister brand, Investor Daily, Mr Oliver flagged further concern that the RBA may be "getting a bit too hawkish", as the hiking cycle resumed before the release of the latest retail sales figures, to which the central bank stated would influence its strategy.

“The Reserve Bank indicated it wanted to assess the state of the global economy, labour market inflation and retail sales,” he said.

“But we haven't got an update of retail sales over that period [and] the inflation numbers we saw were actually better.”

Furthermore, Pradeep Philip, head of Deloitte Access Economics, stated the rate hike showed that the RBA is “still playing recession roulette, despite briefly and sensibly walking away from the table when it paused rate hikes last month”.

“The decision to lift the cash rate by 25 basis points to 3.85 per cent is unnecessary given 10 previous rate hikes are still working their way through the economy,” Mr Philip said.

“Meanwhile, hundreds of thousands of mortgage holders are still to see their repayments surge as pandemic-era low fixed rates revert to variable, while businesses continue to be squeezed.”

Mr Phillip added the latest CPI data indicated that inflation is "clearly slowing" and the fact that it is while unemployment sits at record lows "is a good thing".

"And as the RBA statement notes, despite record low unemployment, wage growth has not spiralled and is still consistent with the inflation target.

"With the recent independent review into the RBA reminding Australians that full employment sits alongside price stability in the bank’s mandate, it is important that the RBA exercises caution on rate rises until it has seen the impact of the last 10 fully pass through the economy," Mr Phillip stated.

Westpac chief economist Bill Evans stated markets and economists had difficulty following the RBA’s guidance.

“We were surprised by the decision given the guidance in the lead-up to today,” Mr Evans said.

“Going forward the weakness in the economy and slowing inflation is likely to eventually see the tightening bias fade; rates remain on hold for the remainder of the year with rate cuts beginning in the March quarter next year.”

ANZ head of Australian economics Adam Boyton said the major bank has once again adjusted its terminal cash rate forecast based on the RBA’s decision.

“Given our own concerns about the stickiness of services and non-tradables price inflation, the robustness in the labour market and the business sector, we will retain a 25-bp rate hike for August. That takes our estimate of the terminal rate (back) to 4.1 per cent,” Mr Boyton said.

Commonwealth Bank of Australia (CBA) head of Australian economics Gareth Aird said while the major bank anticipated the 25-bp rise, the outcome was “not expected by financial markets or the forecasting community”.

“Key to our call for the board to hike the cash rate [this month] was the expectation that the RBA would leave their forecast for inflation to only return to the top of the target band by mid-2025 unchanged,” Mr Aird said.

“The RBA kept their inflation forecasts, as we anticipated.”

NAB has already moved to pass on the new interest rates, raising its variable home loan interest rate by 0.25 per cent per annum as of 12 May 2023.

[RELATED: Cash rate hits 11-year high]