Reserve Bank of Australia Monetary Policy Meeting: Economists Warn Against Further Interest Rate Rises

The Reserve Bank of Australia (RBA) is set to hold a monetary policy meeting on August 6, and economists are raising concerns about further interest rate hikes. They argue that such increases could have a detrimental impact on business and household confidence, potentially undermining the cautious economic recovery that is currently underway.

Stephen Smith, a partner at Deloitte Access Economics, asserts that any additional interest rate hikes cannot be justified and would pull the rug out from under the recovering economy. He suggests that if rates remain on hold, the narrative of a strengthening Australian economy throughout the second half of 2024 would remain intact.

The release of inflation data for the June quarter by the Australian Bureau of Statistics (ABS) on July 31 will play a crucial role in shaping the RBA’s decisions. Smith outlines two possible scenarios that could result in different economic trajectories for the year ahead. If inflation in the June quarter is high, the RBA may feel compelled to raise interest rates in early August. However, Smith argues that this would further erode household and business confidence, negating the benefits of tax cuts and wage gains. Alternatively, if the June quarter inflation result is more benign and aligned with the slower pace of growth in the Australian economy, the RBA may choose to keep interest rates steady. This would enable households to lead a steady recovery in economic growth in 2024-25. Deloitte Access Economics’ forecasts align more closely with the latter scenario.

Cathryn Lee, another partner at Deloitte Access Economics, agrees with Smith that interest rates should remain unchanged. She argues that interest rates are already restrictive at their current levels. Additionally, while inflation is retreating towards the target, it is not happening as quickly as hoped. Lee believes that further interest rate hikes are unlikely to have a significant impact on price growth. She also points out that the surge of post-pandemic inflation hit Australia later than other economies, resulting in an earlier cooling effect elsewhere. Moreover, the prospect of lower policy rates in the United States and New Zealand has become stronger recently.

Looking ahead to the RBA meeting, it is essential to consider the current state of interest rates. The official cash rate stands at 4.35 percent, and the March Consumer Price Index (CPI) data revealed a 3.6 percent year-on-year increase in inflation. The RBA has consistently emphasized its goal of maintaining consumer price inflation within the two to three percent range.

Luci Ellis, the chief economist at Westpac Group, highlights that disinflation has resumed in the United States, Canada, and New Zealand. As a result, expectations of near-term cuts in policy rates have reemerged in these countries. Ellis explains that tight monetary policy cannot last indefinitely, and rate cuts need to begin before inflation reaches the target due to the lag effects of monetary policy on inflation. She believes that most private sector forecasters expect inflation in Australia to decline to the RBA’s target range at a similar pace. However, there are outliers who hold a different view. According to Ellis, those arguing that the RBA is far from cutting rates must provide a compelling reason why Australia would not follow the same disinflation trend as other advanced economies.

Ellis acknowledges that Australia opened up later than most advanced economies after the COVID-19 pandemic, leading to a delayed surge in inflation. She notes that the RBA is intentionally adopting a strategy of maintaining slightly higher interest rates for a longer period to sustain the progress made in reducing unemployment. Consequently, it is reasonable to expect that the RBA will be one of the last advanced economy central banks to initiate rate cuts.

National Australia Bank forecasts that the RBA will maintain interest rates at their current level for the remainder of the year. This projection aligns with the views of Deloitte Access Economics and the cautious approach taken by the RBA to support the ongoing economic recovery while managing inflationary pressures.