The floor has been littered with shards of crystal in recent months as the economic soothsayers have routinely miscalled the Reserve Bank of Australia’s next move on interest rates.
Not that you can blame them entirely. The mood within the boardroom at 22 Martin Place has experienced some wild swings this year which has translated into a series of chaotic about turns in messaging to the outside world.
From a benign sense of relief late last year to a panicked lift in February, a pause in April and then consecutive hikes in May and June that blindsided many economists, the experts have abandoned logic and instead resorted to coin tossing as the best way to predict the RBA’s next move.
Little wonder then, the calls appear evenly split about whether we will see another rate hike today.
Here, however, are five reasons why the RBA should hold.
1. Inflation is on the wane
The whole idea behind raising interest rates is to choke inflation, hopefully without strangling the economy, a notoriously tricky juggling act.
And despite all the arguments and disputes about how it started, who’s to blame and what’s driving it now, the one thing everyone agrees upon is that inflation has peaked and the rate of price growth is declining.
The light blue line in the graph above charts the headline rate of inflation, which has dropped from a 7.3 per cent annual rise in December last year to 5.6 per cent in May.
The other two lines graph inflation measures that strip out volatile items like fuel. While the declines in these measures haven’t been as pronounced, they are nevertheless, obvious.
Clearly, the pain meted out by the RBA during its ruthless campaign in the past year is spreading through the community.
In April, when the monthly inflation numbers came in at well above expectations, a large number of economists whipped themselves into a lather urging the RBA to further tighten the screws.
Last week, however, the inflation reading was well below expectations, showing just how volatile and imprecise the recently installed monthly readings are. But still the armchair experts are calling for more.
Given the instability of the monthly data, the RBA board may be best advised to await the more comprehensive June quarter inflation reading, due out in a few weeks time, to make a more considered decision.
2. Evidence of a dramatic slowdown everywhere
Despite the recent deceleration in prices, inflation – if measured on an annual basis – is still well above the RBA’s Goldilocks level of between 2 and 3 per cent.
But individual statistics never tell the complete story. And if you measure inflation in an alternate way, a completely different picture emerges.
The annual inflation rate delivered every four weeks measures the changes each month and combines those numbers over 12 months to deliver an annual rate.
Essentially, it compares prices now to where prices were a year ago. So, a big spike in inflation over Christmas or even 11 months ago would still elevate the most recent inflation reading.
But what if you just compare prices this month to last month? That’s exactly what the Australian Bureau of Statistics is now doing. And if you dig into those numbers, you’ll find inflation has been slowing sharply since Christmas.
In fact, between April and May, the last two releases, it went backwards.
That’s where the danger of overreacting emerges. Actual inflation may already have slowed to the required level but is simply not showing up because of the way we measure the changes.
Out in the real world, red lights are flashing everywhere.
For the past few months, a conga line of retailers from Harvey Norman to David Jones have been lining up to report a worrying drop in sales. Meanwhile, a roll call of the country’s biggest banks from Commonwealth through to Macquarie are reporting a slowdown in spending through their payment systems.
Clearly, the sharpest lift in interest rates in history is having an impact, and one that is gaining momentum. Which raises the question: Is now the time to hit the brakes even harder?
3. Property — calm before the storm?
Who would have thought it possible? In any normal world, a crippling round of rate hikes would see the bottom fall out of the property market. It did last year but now is recovering.
Led by Sydney, real estate has been on a tear, recouping a decent portion of last year’s losses across the nation including the regions.
If the RBA’s big kahuna Phil Lowe could be granted one last wish before loading up the panel van, it would be to see real estate prices in a gentle swoon; not enough to cause too much damage mind, just to discourage spending.
Unusual it certainly is. It may also be temporary.
The popular explanation is that there is a shortage of properties on the market, that having become accustomed to ridiculous prices at the peak, sellers are backing away from listing their property until they can fetch a record price and that shortage is fuelling the recovery.
Volumes may soon be about to rise. An armada of first home buyers dropping off ultra low fixed rate loans and onto expensive variable loans are about to get their first taste of income sapping mortgage repayments.
Even the RBA admits that at interest rates around these levels, about 15 per cent of Australian households would be experiencing negative cash flows.
On cue, there’s been a sudden spike in homes, owned for two years or less, being sold for a loss.
During the pandemic first home buyers splurge, just 3 per cent of properties held for less than two years were sold at a loss. That’s suddenly now leapt to 12.3 per cent.
And as more of the 880,000 households switching to variable loans this year approach what is being termed “the mortgage cliff”, many won’t have the choice of whether to hold on for a better price. They’ll be forced to sell.
4. Pricing us into inflation
If you haven’t already noticed, power prices surged again in the last couple of days.
Not because the price of fossil fuel has gone haywire again. In fact, the opposite is occurring. International coal, oil and gas prices are back to where they were before Russia’s ham-fisted invasion of Ukraine.
Many of our “regulated” industries are given carte blanche to simply bake in past cost increases into their future cost pricing.
Toll roads are able to jack up the price to cover previous inflation, essentially baking in past cost increases.
Property rent, one of the biggest components of the Consumer Price Index, also has a direct link to previous rate hikes. While the supply and demand of rental properties ultimately determines rents, if there is a shortage of vacant rentals — as is now with the resumption of large scale immigration – landlords are better able to raise rents to cover the cost of rate hikes.
That further boosts the inflation reading and adds pressure to hike rates, until it’s all too late.
5. Running short of ammo
The RBA only has a few more shots left to fire.
Pumping them into the air now, in the hope it hits the inflation target without hurting anyone is no longer an option.
The reason so many young Australians are facing a desperate struggle is because they were enticed by the RBA into the housing market.
While, on average, we appear to be reasonably well equipped to handle the upcoming financial storm, very few of us are average.
There is a relatively large group of older, well established and financially secure Australians with little debt and reasonable savings. At the other end are a large group who could find themselves forced to sell with debts they will forever struggle to overcome.
Last month, the RBA minutes revealed a deeply divided board that only just voted in favour of further rate hikes.
With the economy slowing, inflation pressures easing and household expenditure diving, starting the new financial year with hike number 13 could well prove to be an ominous sign for a delicately poised economy.