Stimulatory rate settings require more action from Reserve Bank after July meeting

Despite house prices starting to feel the pinch, a string of rate hikes are still expected after the Reserve Bank’s July board meeting.

Economists said the unanswered question before the July board meeting was whether directors would still see a revised, 1.35 per cent cash rate as stimulatory. Picture: Getty Images

The market has locked in expectations for a 50 basis-point hike in official rates by the Reserve Bank on Tuesday, with all eyes on the fine print and the subsequent board minutes for the central bank’s thinking on the longer term trajectory of monetary policy.

Economists said the unanswered question before the board meeting was whether directors would still see a revised, 1.35 per cent cash rate as stimulatory.

Independent economist Saul Eslake said there was no doubt it was stimulatory, given that real rates – after adjusting for inflation – would still be negative.

“It’s certainly not enough – 1.35 per cent,” Mr Eslake said.

“The cash rate would have to be at least 2.5 per cent, bearing in mind that no borrower actually pays the cash rate.

“I think the RBA, because it started late, is on a mission to lift the cash rate to 2.5 per cent, almost independently of the data and with some degree of urgency.”

Policy, he said, was still loose, despite inflation breaching five per cent, economic growth exceeding four per cent and unemployment plunging below four per cent.

House prices, on the other hand, were starting to feel the pinch.

According to CoreLogic data released on Friday, price falls in the nation’s five biggest cities accelerated from 0.4 per cent in May to 0.8 per cent in June.

Values in Sydney were down 1.5 per cent in June compared to one per cent in May, while dwellings in Melbourne fell one per cent in June compared to 0.7 per cent in May.

Deutsche Bank said in a note on Friday that it now expected prices to retreat by 15 per cent over the 12 months to mid-2023, before recovering by 5 per cent in the year to mid-2024.

The RBA, it said, was likely to tighten rates more aggressively, with the cash rate to reach 3.1 per cent by the end of this year.

“If our forecasts prove accurate, the middle of next year will see the weakest house price growth recorded in Australia for more than 50 years,” economist Phil Odonaghoe said.

“Even so, the trough we expect is still shallower than the most recent peak: 22 per cent year-on-year growth in the fourth quarter of 2021.”

Westpac chief economist Bill Evans agreed that interest-rate policy would still be stimulatory at 1.35 per cent.

In fact, a third consecutive rate hike of 50 basis points was likely at the August meeting of the RBA board.

“We would be very surprised if the statement (on Tuesday) indicates a commitment to scale back the rate hikes to that ‘steady’ 25 basis points process for the remainder of the year,” Mr Evans said on Friday.

“In fact, our view would be that a better policy would be to raise the cash rate by 50 basis points in August and then pause in September so that the unprecedented accumulation of four consecutive meetings totalling 175 basis points can be assessed.”

Mr Evans said a key data point before the August board meeting would be the June quarter inflation figure, to be released on July 27.

He forecast a headline inflation figure of 5.9 per cent, up from 5.1 per cent, with a trajectory towards seven per cent by the end of the year.

An outsized inflation figure, with official rates still in the stimulatory zone, would support the argument for a further 50 basis-point adjustment in August.

In other developments on Friday, National Australia Bank followed in Commonwealth Bank’s footsteps, hiking its fixed rates for owner-occupiers and investors across all terms by up to 110 basis points.

CBA was even more aggressive, increasing all its fixed rates by 140 basis points.

The increases were attributed to higher funding costs and “current market conditions”.

Investment bank Jarden Group estimated that Australian households would take a $45bn-a-year hit on higher mortgage payments by the end of next year, as cheap fixed-rate loans expired and banks passed on hikes in official rates to their customers.

Households were likely to respond by cutting discretionary spending.

Meanwhile, the impact of the rising rate environment is yet to be felt in lagging indicators such as credit growth.

RBA data on Thursday said annualised credit growth in May – the start of the rate-hiking cycle – was unchanged at 10 per cent, on stronger growth in housing credit of eight per cent and slightly softer, 16 per cent growth in business lending.