RBA Newsflash: September 2022

Updated September 6th 2022

The Reserve Bank of Australia (RBA) board has increased the cash rate for the fifth month in a row.

The RBA has continued its run of 50-basis-point (bp) hikes since June, as announced following its September board meeting today (6 September).

As such, the official cash rate is now 2.35%. The last time Australia’s cash rate was at this level was in April 2015.

Australia’s big four banks had collectively forecast this fourth consecutive 50bp increase, which is in keeping with the RBA’s ongoing efforts to rein in inflation, which it expects to reach 7.75%.

The market expects the RBA will keep increasing the cash rate each month, at least until inflation reaches its anticipated peak later this year.

The Reserve Bank of Australia is not shying away from its goal of bringing inflation back inside the target band, and today further increased the cash rate target.

Since recent retail trade, labour force and business sentiment data all point to continued ‘heat’ in the economy, even though consumer sentiment and house prices continue to weaken.

We expect that the RBA will not hit the pause button on cash rate increases until retail trade data starts to better reflect downbeat consumer sentiment, and this could happen as soon as the December shopping period – which is when mortgage holders would be “really feeling the effects of higher repayments” and higher prices.

However, increasing the complexity for the RBA is the record-low unemployment rate, coupled with low migration – the labour market is poised to remain tight for some time.

The risk is that this encourages continued high consumption, even when sentiment is low, and the RBA is forced to continue to increase the cash rate target.

On the flip side, households are finally starting to work through their savings, which could start making more consumers pull back their spending.

The question is will consumers be spooked enough by their savings falling to reduce their spending, even when job security is so high.

Tightening Cycle
Economist have also commented on the rate movement, suggesting the RBA board remained “committed to overcoming the challenge of high inflation currently facing the Australian economy.”

To ensure inflation expectations remain anchored around its 2-3% target, the RBA has continued to frontload its hiking cycle, highlighting that “the fastest rise to the cash rate since 1994 has seen home prices falling across the country.”

Today’s rate hike will further increase borrowing costs and reduce maximum borrowing capacities, pushing property prices further down.

The level of interest rates will be a key factor of housing market conditions and the pace and depth of home price falls in the period ahead.

As well it is noted that the economy had “entered the tightening cycle with strong momentum” but that even though consumer confidence had fallen sharply, the labour market remained tight, the unemployment rate was at a 48-year low, spending was yet to slow, and business conditions remain strong.

These conditions have allowed the RBA to continue raising the target cash rate toward their estimates of the neutral rate (2.5-3.5 per cent), whilst monitoring the evolution of household spending as interest rates rise – a key source of ongoing uncertainty.

Looking forward, “the lagged effect of rate rises” coupled with the large share of variable rate borrowers ahead on repayments (and some borrowers on fixed terms yet to expire), means many mortgage holders have not yet felt, or are only now beginning to feel, the impact of the initial rises.