In his weekly market update, AMP’s Shane Oliver said that while he expects a hold at the Reserve Bank’s Tuesday meeting, a tightening bias will prevail.
Dr Oliver highlighted that while RBA governor Michele Bullock remains hawkish, recently citing concerns about robust economic activity and demand-driven inflation, she has acknowledged potential “distributional consequences” of rising rates, emphasising the need for caution in the RBA’s approach.
“In particular, her recent comments lacked the sense of urgency to raise rates that her comments prior to the November meeting had,” Dr Oliver opined.
“And since the last meeting, we have seen a slight rise in unemployment, softer retail sales, lower-than-expected inflation, and a slowing in national home price growth with some cities seeing price falls. So there is ‘no smoking gun’ to justify another rate hike on Tuesday.”
That said, however, Dr Oliver acknowledged that the RBA will be cautious about reading too much into the October monthly CPI, which revealed a fall to 4.9 per cent year-on-year, down from 5.6 per cent a month earlier.
“Our base case is no change in rates on Tuesday and that the cash rate has peaked ahead of rate cuts in the second half of next year.
“That said, the risk of another rate hike – which would most likely be at the next meeting in February if it occurs – remains high at around 40 per cent.”
A rate hike, he warned, would act as “overkill”, but key to watch will be the December quarter inflation data due in late January and the next two rounds of jobs and retail sales data.
The money market is pricing in a zero probability of a rate hike on Tuesday, which, Dr Oliver said, “seems a bit too low” and only 26 per cent chance of another rate hike by May next year.
Expanding on governor Bullock’s recent statement that Australian households are in a “pretty good position”, Dr Oliver said that despite low mortgage delinquencies and some positive economic indicators, the substantial increase in debt servicing payments due to rate hikes poses a significant challenge. Namely, the RBA’s own analysis revealed that approximately one in seven borrowers were cashflow negative in July, and this situation is likely worse now, he said.
“This means that their income is below their essential living and mortgage costs, with no scope for any discretionary spending. Sure, many may be able to run down their savings but there is a limit to this and many have likely already hit that limit – but either way, it means a big hit to spending and quality of life which is already showing up in falling real retail sales per person and warnings of weak demand from retailers,” Dr Oliver said.
“And the longer it continues, the more it will mean weaker employment and rising unemployment, which will severely question the ‘doing fine’ assessment. All of which underlines the challenge facing the RBA – to bring down inflation but without pushing unemployment up too much – and the need to be ‘a little bit careful’.”
Looking forward, Dr Oliver said the next 12 months are likely to see a further easing in inflation pressure and central banks moving to get off the brakes.
“This should make for reasonable share market returns, provided any recession is mild. But sticky services inflation, still high recession risk, China worries, and geopolitical risks are likely to ensure a few significant bumps along the way,” he concluded.
