One pause does not end RBA rate hikes

RBA governor Philip Lowe. Picture: NCA NewsWire / Gary Ramage

No, this pause does not signal – or, even less, guarantee - the end of rate hikes.

But every time we do get a pause, there’s a chance of a second, successive pause the following month.

That of course didn’t happen after the first pause in April – we then got two successive hikes in May and June.

And specifically, whether we do or do not now get a second pause in August turns almost entirely on what the June quarter CPI numbers show the week before the meeting.

The key point to understand, though, is that one pause opens the door to two successive pauses.

That’s a statement of the pretty obvious.

But, whether it is next month, or we have to wait until later in the year for two successive pauses, it’s that ‘two-fer’ that’s the key to a succession of pauses and the end of rate hikes in this cycle.

As RBA governor Philip Lowe explained, interest rates have gone up 4 percentage points since May last year. That’s clearly impacted consumer spending and the broader economy.

But a number of other factors have been very significantly diluting that impact. Three big ones in particular.

One is the massive - 750,000 in two years – immigration, pouring demand into the economy.

Another is the $1 trillion-plus level of household deposits. The higher interest rates on those deposits are going a long way to offset the impact of the higher rates on home loan repayments.

RBA governor Philip Lowe. Photographer: Brent Lewin/Bloomberg via Getty Images

Third is the emerging wages surge, led off by the National Wage case and the Federal and NSW governments locking in 4 per cent-plus – in practice therefore, at least 5 per cent-plus - wage rises across their workforces.

Then you need to add on that much of the inflation is mandated by government, led off again by the 20-25 per cent increases in power charges.

That all points to inflation becoming increasingly sticky above – at least - 5 per cent. And in that world, a 4.1 per cent official interest rate is just not going to get the job done.

Enter then, the decidedly troubling matter of Lowe’s successor.

Lowe’s got two more meetings.

Although treasurer Jim Chalmers has not publicly signalled he won’t be extended; it’s clear that he won’t be.

Chalmers has committed to revealing his decision this month. First, that there will be a new governor; and presumably also who that person will be.

I think he really must do it in the next week or so.

The two head off to India together at the end of next week for the G20 finance ministers and central bank governors meeting.

Is Chalmers really going to maintain the charade up to and through that meeting of ‘business as usual’?

Chalmers has also committed to keeping the 2-3 per cent inflation target under the new governor and new RBA rate-setting structure.

Yes, you can have ‘the target’, but will it really be pursued aggressively by a dovish successor?

It’s not as if Lowe has been anywhere near aggressive as his key peers; prepared to take three years (from start of hiking in 2022) to mid-2025, getting inflation down even just to the 3 per cent top end.