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Has the interest rate summit been reached?
By Shane Wright
Reserve Bank governor Philip Lowe may have finally planted his flag at the top of Mount Interest Rate.
His statement confirming the cash rate would be held steady at 4.1 per cent for a second consecutive month contained the usual caveats about the possibility of more rate rises.
Mortgagees have climbed rates to the heights. Credit: Thredbo.com.au
A central bank that has dragged home buyers over an increasingly craggy and dangerous mountain range of financial pain would never readily admit that further monetary policy tightening is off the agenda.
It needs to keep consumers on their toes; that there is every chance if they spend too much too quickly, keeping inflation higher than it should be, then another climb awaits them.
But the reality is that if the bank believed to its core that more rate pain was necessary, it would have acted on Tuesday.
The RBA is most likely to vary the cash rate in its meeting immediately after a quarterly inflation report from the Australian Bureau of Statistics. Of all its changes to interest rates over the past 30 years, almost half of them have occurred in the months of February, May, August and November.
The bureau delivered the June-quarter CPI last week. Now was the time to strike, if the Reserve was convinced inflation pressures were still building.
By not moving, the bank has increased the hurdle for a future rate rise. That’s not to rule out another quarter of a percentage point increase in the coming months, but it would require a major and unwelcome surprise.
And the surprises we’re seeing in the domestic and global economy over recent months have been on the downward slope of Mount Interest Rate.
Inflation is easing faster than expected in major economies around the world. China is in such a pickle it is looking at ways to stimulate the economy.
Despite its ingrained fears of ultra-low unemployment producing wage-led inflation, the bank still has no evidence of a wage-price spiral.
All through COVID-19, the RBA has noted the huge amount of cash stashed away by households. They are now eating into that money (bank deposits fell for the first time in two years during June).
It knows that the economic fallout from its past rate rises has a long way to go before they are fully felt by consumers and businesses.
A rate change can take between 12 and 24 months before its impact has spread across the entire economy. That means there’s about 2.25 percentage points worth of higher interest rates still to hit all and sundry.
And those areas of the economy showing the most inflation – rents, insurance and housing – are being driven by supply issues rather than demand. Higher interest rates are not going to increase the number of rentals on the market, build more homes or reduce the premiums imposed on people who need to insure their houses or cars.
Even the governor’s post-board meeting statements are showing a slowdown in inflation. His June statement, outlining the causes for a rate increase, ran to 577 words. In July, he needed 597 to explain a pause. His August commentary required 600, just another three words.
Lowe’s seven-year term as governor finishes after the September board meeting.
With inflation easing, the economy still growing and unemployment around 3.5 per cent, he could rightly declare himself king of the mountain.
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