Since May 2022, the Reserve Bank of Australia (RBA) has actioned a cumulative 400 bps in hikes to the official cash rate, from a record low of 0.1 per cent to an 11-year high of 4.1 per cent.
The hikes sought to quell inflation, which hit a peak of 8.4 per cent in December 2022 — the highest in decades.
The tightening cycle has largely achieved its disinflation objective, with the latest data from the Australian Bureau of Statistics (ABS) revealing the consumer price index (CPI) eased to 4.9 per cent in the 12 months to July 2023.
This is despite inflation remaining well above the RBA’s target range of 2–3 per cent.
However, according to Deutsche Bank strategists Tim Baker and Nav Aithani, the RBA has done enough to ease inflationary pressures, and may have gone too far, despite actioning fewer hikes than some of its global counterparts.
The US Federal Reserve, for example, has lifted the federal funds rate by 525 bps and continues to retain a tightening bias despite evidence of sustained disinflation.
But the Deutsche Bank strategists have claimed the local tightening cycle has imposed a heavier burden on Australian borrowers, given wages growth is subdued relative to international counterparts and local banks have more readily passed on hikes to consumers.
“The pass-through of policy rates to the average mortgage rate has been quite large in Australia, and quite minimal in the major regions,” the analysts report.
“The average rate on outstanding mortgages has doubled to 5.5 per cent in just 15 months.”
This, they added, reflects the larger proportion of Australian borrowers with variable rate home loans.
“In sharp contrast, with the prevalence of 30-year fixed mortgages the average US mortgage rate is up a miniscule 30 bps – likely helping fuel recent US growth exceptionalism,” the Deutsche Bank analysts added.
“It’s not much higher in Europe – 66 bps in the euro area, 97 bps in the UK.
“The pass-through to average mortgage rates in all three of those regions is below 20 per cent versus 70 per cent in Australia.”
As such, the Deutsche Bank strategists have claimed the RBA’s monetary policy strategy has been more aggressive than that of its counterparts.
“So, to the extent that the mortgage rate channel is a major one for policy transmission, the RBA has actually tightened far more than major peers,” they observed.
The central bank is expected to keep rates on hold over the short-to-medium term, before considering cuts in 2024.
But the RBA is yet to rule out further hikes to the cash rate.
Following its latest monetary policy board meeting, the RBA said some further tightening “may be required to ensure that inflation returns to target in a reasonable timeframe”.
The RBA reiterated the caveat that any prospective considerations for monetary policy would “continue to depend upon the data and the evolving assessment of risks”.
“In making its decisions, the board will continue to pay close attention to developments in the global economy, trends in household spending, and the outlook for inflation and the labour market,” the post-meeting statement read.
“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”
The ASX’s RBA Rate Tracker suggests a 91 per cent probability (as of 11 September) of a hold at the central bank’s next monetary policy board meeting on Tuesday, 3 October – the first meeting of Michelle Bullock’s governorship.
