RBA rate rises to hit families and squeeze Labor

The Reserve Bank feared a financial market backlash if it was the first among central banks to slow the pace of interest rate hikes, according to its latest board minutes.

The Reserve Bank will keep raising interest rates this year to tame inflation, putting the squeeze on families and the Albanese government’s policy options as it confronts the floods crisis and a sharply slowing global economy.

Jim Chalmers said next Tuesday’s budget would walk a “pretty tight line” by helping households while avoiding adding to inflationary pressures and pushing up borrowing costs.

“We want to provide that cost-of-living relief, but we don’t want it to be counter-productive,” the Treasurer said.

On Tuesday RBA deputy governor Michele Bullock said the central bank “expects to increase interest rates further over coming months”, with moves guided by the state of the world economy, household spending and wage- and price-setting behaviour.

“You should be in no doubt, though, that the board is determined to do what is necessary to return inflation to target,” Ms Bullock told the Australian Finance Industry Association.

At a headline rate of 6.1 per cent, Ms Bullock said, “inflation is too high in Australia and is expected to rise further”, with the RBA tipping it to peak at around 7.75 per cent this quarter.

“While a lot of this can be explained by global factors such as supply chain disruptions and energy prices, there is an important element of strong domestic demand,” she said.

“Indeed, the labour market is very tight – unemployment is as low as it has been in around 50 years – and this is starting to put upward pressure on wages. For all these reasons, interest rates need to rise to ensure inflation returns to the 2 to 3 per cent band over time and that inflationary expectations remain anchored.”

Meeting monthly allows the RBA more flexibility than some other central banks, it noted. Picture: Bloomberg

Ms Bullock said strains on household budgets from five previous cash-rate hikes and a global economic environment that has “deteriorated quite sharply” were behind the RBA’s surprise decision to lift its cash rate target a fortnight ago by only 25 basis points to 2.6 per cent.

“For these reasons, the board felt that a smaller increase in October was warranted while it took stock of developments in consumption, wages and the international economy,” she said.

The International Monetary Fund downgraded its global output forecast for next year to 2.7 per cent, its weakest profile in two decades outside the global financial crisis and Covid-19 pandemic, with Australia’s growth halved to 1.9 per cent.

In minutes published on Tuesday, the RBA conceded it risked a backlash from financial markets, which were expecting a 50-basis-point rise at this month’s meeting.

“If the board were to reduce the size of the rate increase, it would be the first to do so among advanced economies,” the minutes said of its policy discussions.

“This might in turn prompt an unhelpful reaction in inflation expectations and financial markets, if the community came to question the board’s resolve to reduce inflation.

“Ultimately, if upside risks to inflation were to materialise, or the credibility of the path to reduce inflation came into question, it would be costly to re-establish low inflation.”

Floods in NSW, Victoria and Tasmania are expected to raise grocery prices, slow the economy and add to spending in next week’s federal budget.

The RBA noted it was awaiting further data on how households were handling previous rate hikes. Picture: NCA NewsWire / Jeremy Piper

“We’re still counting the costs and assessing the damage, but there will be a substantial impact on the cost of living,” Dr Chalmers told Nine’s Today program.

“There will be a substantial impact on the budget. There’s no use pretending otherwise.”

ANZ senior economist Catherine Birch told The Australian flooding in the nation’s food bowl will have an inflationary impact in this quarter and into next year.

“In the near term, the reduction in food production and disruption to supply chains – such as road closures affecting transport, people not being able to work – will constrain supply and push up prices,” Ms Birch said.

“But the inflationary effect is likely to stretch into 2023, particularly if the flooding hinders the summer planting season.”

According to the latest ANZ-Roy Morgan survey, consumer confidence plunged by 2.8 per cent last week.

ANZ head of Australian economics David Plank said the weaker Australian dollar and higher petrol prices likely led to a surge in household inflation expectations to 6 per cent.

“The longer confidence remains so low the greater the prospect that consumers become more cautious, especially with household wealth going backwards due to lower house and equity prices,” Mr Plank said.

Ms Bullock said the RBA had more flexibility than its peers because it met more regularly to assess the evidence, “a particular advantage in uncertain times”, allowing recalibration if necessary.

“It also means that if we increase interest rates at every meeting, we can potentially move much faster than overseas central banks. Or, alternatively, we can achieve a similar rise in interest rates with smaller increments.”