RBA Move the Opening Gambit in a Longer Endgame

By Glenn Dyer | More Articles by Glenn Dyer

Having lifted rates once, the Reserve Bank says it will do so again – following the script used by the US Federal Reserve, the Reserve Bank of NZ, the Bank of England and central banks in Canada, South Korea and a number of other smaller economies.

Seeing it was the first rate rise in 11 years (by a quarter of a per cent to 0.35%), the bank had to provide some sort of indication that more increases would be following – so it can appear to be tough on inflation and get it back to around 3% by 2024.

The move saw banks starting to review their variable home loan rates with talk of Westpac perhaps first in line.

The ANZ is due to report its March half year results on Wednesday morning and will be able to talk about what it will do. The NAB reports Thursday but may have well lifted its rates by then.

Last night the Commonwealth became the first bank to lift rates, adding the full 0.25% to its various rates. taking the standard variable rate to 4.80%.

From the statements and comments yesterday, it is clear that the RBA has switched its narrative from one of patience and waiting and seeing what happened to jobs, inflation and wage rises – to focusing almost solely on inflation.

“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” Lowe said in his post meeting statement.

“This will require a further lift in interest rates over the period ahead. The Board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases.”

“The central forecast for 2022 is for headline inflation of around 6 per cent and underlying inflation of around 4¾ per cent; by mid 2024, headline and underlying inflation are forecast to have moderated to around 3 per cent,” he said.

The RBA’s target for underlying inflation is 2-3 per cent. Headline inflation is currently 5.1 per cent, and underlying inflation is 3.7 per cent.

It is the first rate rise since November 2010 when the cash rate was raised to 4.75%. This time the cash rate will be a tiny fraction of that – 0.35%.

And yet the economy will be much stronger than back then, with jobs growth the strongest on record, unemployment of 4% and forecast by the bank to fall to 3.5% and growth this year of more than 4%, but easing back to 2% in 2023.

In his post meeting statement, Governor Phil Lowe said the board had “Judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic.”

“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.”

“The resilience of the Australian economy is particularly evident in the labour market, with the unemployment rate declining over recent months to 4 per cent and labour force participation increasing to a record high. Both job vacancies and job ads are also at high levels.

“The central forecast is for the unemployment rate to decline to around 3½ per cent by early 2023 and remain around this level thereafter. This would be the lowest rate of unemployment in almost 50 years,” the governor’s statement said.

Deep in the statement was the news that the RBA will add to the series of rate rises by tightening monetary policy via shrinking the size of its balance sheet.

The Fed and other banks are doing the same – gradually reducing the stock of bonds bought during the period of support for the economy of record low rates, the Term Funding facility for banks and targeting the 3-year bond rate at 3% and keeping yields and the dollar low by buying 10 year bonds.

In Tuesday’s statement Governor Low said “the Board does not plan to reinvest the proceeds of maturing government bonds and expects the Bank’s balance sheet to decline significantly over the next couple of years as the Term Funding Facility comes to an end. The Board is not currently planning to sell the government bonds that the Bank purchased during the pandemic.”

In a speech to a media briefing late Tuesday, Dr Lowe said.

“This means that our bond holdings and balance sheet will decline as bonds mature. Our balance sheet will also decline substantially in 2023 and 2024 as banks repay the funding made available under the Term Funding Facility.

“This contraction of our balance sheet will contribute to some tightening of financial conditions in Australia and so assist with the return of inflation to target.

“This decision to proceed with quantitative tightening does not rule out a return to quantitative easing sometime in the future, should circumstances require that.”

In a comment, the AMP’s Chief Economist, Shane Oliver said he expects the cash rate to rise to 1.5% by year-end and to 2% by mid next year. “ ut the RBA will only raise rates as far as necessary to cool inflation and high household debt has likely made rate hikes more potent.”

“Rate hikes are unlikely to de-rail the economic recovery just yet as monetary policy is still very easy, but they will add to the slowdown in home prices, where we see average dwelling prices falling 10 to 15% into early 2024,” he added.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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