BDO partner Guy Taylor says RBA may be forced to hike rates earlier than planned if there is sustained inflation

If we see sustained inflation, the Reserve Bank may be forced to act by increasing interest rates sooner than anticipated.

Many business owners I speak with are experiencing a pent up demand mainly due to delayed expenditure carried over from last year and a renewed optimism from consumers.

In main, we haven’t had the extended lockdowns and harsh restrictions the rest of the world has endured, but we have had the same monetary and fiscal stimulus which has boosted the economy. Share markets are back above pre-crisis levels, house prices are at all-time highs and business profitability is up with the exception of some sectors.

This shows the power of co-ordinated stimulus measures from central banks and governments.

With this in mind, the question many are asking is, can the Reserve Bank stick to their guns and not increase official interest rates before 2024?

If we see inflation, like we’re seeing now in sectors such as house prices, home building and renovations, new and second hand car markets, caravan and boat sales, as well as an increased demand in restaurant bookings and local holidays, will we see official interest rates rise sooner than currently expected?

If we see sustained inflation, the Reserve Bank may be forced to act by increasing interest rates sooner than anticipated.

BDO Brisbane private wealth partner Guy Taylor.

If that happens, then this may flag a big reset for asset prices.

A change in the risk free rate from which many asset managers build their valuation models, will have flow on effects if the Reserve Bank is forced to increase interest rates from the current 0.1 per cent.

The test will not only be if they increase rates, but also how they apply the brakes and communicate this with the market.

The real question is whether this is real inflation or it is just transitory? Is this actual inflation, or is this just a shift in behaviour?

A shift in where people are spending money, and the subsequent inflated prices due to a change in supply and demand.

We’re not able to take those expensive overseas holidays and many are redirecting that cash into home renovations, new car purchases, restaurants and local getaways.

The main factor to watch closely, will be wages growth.

Sustained inflation cannot be persistent without wages growth. Pre-Covid we had seen a decade long decline in wages growth due to a range of factors.

The shift in spending outlined above will do little to drive wages growth and as such the RBA will be reluctant to react to transitory inflationary pressures.

In any case, it will be interesting to watch it unfold and will play a critical role in how you position your investments to navigate these uncertain times.

Guy Taylor is a private wealth partner in BDO’s Brisbane office.