‘Concrete evidence’ of rate hike impact: Economists

As the effects of previous rate hikes begin to burden Australians, the likelihood of a June rate hike by the Reserve Bank of Australia (RBA) is fast diminishing, according to economists.

Following a surprising increase in May, economists from major banks are leaning towards a hold in June, with a projected peak of around 4.1 per cent.

The Reserve Bank of Australia (RBA) will meet on Tuesday (6 June) to deliver its next monetary policy decision, which follows May’s 25-bp increase, taking the cash rate to 3.85 per cent.

Economic growth, house lending, building approvals, retail spending, and consumer and business confidence indicators are all showing signs of weakness due to the RBA’s hiking rampage thus far, AMP economist Diana Mousina said.

The minutes from the RBA’s May meeting revealed that further rate hikes may be necessary depending on how the economy and inflation evolve.

Given the central bank’s minutes for May revealed that while further interest rate hikes “may be required”, this would depend on how the economy and inflation evolve and the chance of another hike seems more unlikely.

Of particular note, the minutes highlighted the board’s concern around weak productivity growth that will result in inflation proving stickier with annual wages growth running at 3.5–4 per cent.

In addition, recent labour data from the Australian Bureau of Statistics (ABS) showed that the unemployment rate increased to 3.7 per cent in April, reducing expectations of a June rate hike, Ms Mousina said.

“This backdrop gives the RBA room to keep interest rates steady (and at an elevated level) and assess the impacts from previous rate hikes,” Ms Mousina said.

“There is no urgency for the RBA to lift the cash rate at the next meeting in June and we don’t expect any further hikes in this cycle.

“But the risk still lies with further increases if inflation comes in hotter or if the labour market doesn’t decelerate further and threatens wages growth.”

The April monthly consumer price index (CPI) is due for release on 31 May and unless there is a lift in inflationary pressures, CBA economist Gareth Aird agreed the latest economic data “does not support another rate hike in June”.

“Since the May board, meeting the main economic data that will feed into policy deliberations at the June board meeting has come in slightly weaker than the RBA’s latest forecasts,” Mr Aird said.

“The RBA is presently more concerned around services inflation. So we suspect it will be very hard for the April monthly CPI indicator to be the ‘smoking gun’ that shifts the balance towards a rate rise in June given the rest of the key data the RBA has put weight on so far over the month has printed softer than expectations.

“The rate of inflation in the economy will not drop to the desired level overnight. But the data is encouraging and is directionally moving the right way.

“The case for additional RBA policy tightening is waning.”

Rising mortgage debt eats into household spending

Furthermore, rising mortgage debt is beginning to impact household spending, which has remained elevated since the pandemic.

ABS retail sales data for April showed that annual growth in spending was up by 4.2 per cent, which was down from a peak of 19.3 per cent in August 2022.

“The slowing in retail spending reflects the lift in interest rates and also high inflation leading to lower consumer spending,” Ms Mousina said.

In addition, mortgage repayments are expected to reach a record high of nearly 20 per cent of total household incomes.

However, the full impact of RBA rate increases has not yet been felt by indebted consumers, as there is a lag between when the RBA adjusts interest rates and when mortgage repayments are adjusted.

“For fixed-rate customers, the mortgage rate is only reset at the time of the loan expiry,” she said.

As the majority of fixed-rate loans are expected to roll off around the middle of 2023, Commonwealth Bank economist Stephen Wu said “the flow of fixed-rate mortgages rolling off very low fixed rates started to ramp up in April, with around twice the amount of fixed-rate loans rolling off.

“As a result, households on these fixed rate loans are yet to see the cash flow impact of their mortgage rates resetting higher,” Mr Wu said.

[Related: RBA reveals June hike may be required]