RBA Governor Michele Bullock is expected to announce a May cash rate increase. Picture: Martin Ollman
ANALYSIS
Get ready for drastic action from the RBA at its May meeting.
Make no mistake. Rates will be going up further this year, potentially bringing the cash rate past the 4.5 per cent mark. Now it’s just a matter of how hard and how quickly the central bank moves.
There has been some talk around why the RBA should not hike rates in May. Former breakfast TV host and now Compare the Market spokesman David Koch came out this week saying borrowers deserve a lifeline.
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He said the increase in fuel prices had already delivered a financial impact similar to a rate hike and that the RBA will be “thinking about” Australian households.
“Consumer confidence has plunged and business confidence has fallen to almost record lows,” Koch said. “The (RBA) doesn’t want to crush consumers and businesses with another interest rate increase.”
It’s a reasonable call, but the RBA has showed us time and again that its decisions are based strongly on how certain numbers stack up.
Compare the Market economic director David Koch. Picture: Jono Searle
And those numbers have not stacked up well, with April’s CPI release from the ABS revealing annual inflation is now at 4.6 per cent, up from 3.7 per cent last month.
When the board meets it will look at the inflation numbers. It will decide, if history tells us anything, that these numbers are too high. It will consider the fact that its job is to get inflation under control, which means taking action.
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The only option the RBA has at its disposal is to move the cash rate. Usually the cash rate will move by 25 basis points, or 0.25 per cent. But it doesn’t always.
Back in Covid times, the cash rate was 0.25 per cent and the RBA was set to cut it again to boost the economy. Most people thought it would be cut to zero, but the RBA moved by 0.15 per cent to leave it at 0.10 per cent.
In May 2022, it hiked by 0.25 per cent, the first increase in more than a decade. It was only the beginning, as inflation soared out of control.
What happened next was four consecutive double rate hikes from June to September in 2022. The cash rate went up 0.5 per cent at a time, going from 0.35 per cent to 2.35 per cent.
The moves showed that the RBA was not afraid to act decisively and aggressively once it became obvious that inflation could not otherwise be tamed.
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Former RBA Governor Philip Lowe announced four consecutive double rate hikes in 2022. Picture: Jane Dempster
In May 2026, a 0.5 per cent hike is now a live possibility. Because, while the aftermath of the Covid stimulus spending now seems like a long time ago, the conditions aren’t so different to what they were four years ago.
In April 2022, the quarterly CPI showed annual inflation was 5.1 per cent, driven by significant price rises in housing and fuel. The unemployment rate was 3.9 per cent, with an employment to population ratio of 63.8 per cent.
Today, the CPI is 4.6 per cent, driven by significant price rises in, you guessed it, housing and fuel. Unemployment is slightly higher at 4.3 per cent, but the employment to population ratio is only just up at 64 per cent.
In June 2022, the CPI had risen to 6.1 per cent and then it went to 7.3 per cent by the September quarter, even as the central bank made those four double hikes.
There is enough uncertainty in the world today that they just may hike by 50 basis points a month earlier than they did four years ago, in a bid to stop inflation getting away from them once again.
The one glimmer of hope for rates being left on hold is that the trimmed mean inflation remained at 3.3 per cent, not having changed since the previous month.
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