Rate path more uncertain on sticky inflation: Westpac

Big Four CEO Peter King says while the RBA’s path is more uncertain on stubborn inflation, the divide between consumer and business sentiment remains ‘a conundrum’.

Westpac chief executive Peter King says the narrow path the Reserve Bank is on is now more uncertain because of sticky inflation.

Speaking at a banking conference in Melbourne on Thursday, Mr King also said the divergence between business and consumer sentiment is the “conundrum in the economy” as higher inflation pressures the rates outlook, but demand for both business and home lending is still strong.

“Business sentiment has held up pretty well, consumer sentiment is very low. And that’s probably the conundrum in the economy at the moment,” Mr King said.

“Those tend to come together over time and we hope that consumer sentiment will lift as the RBA enters into a rate-cutting cycle at some point in the future.”

Speaking on the same panel, Bank of Sydney CEO Melos Sulicich said the part of the economy he was most concerned about was small and medium businesses.

“Small businesses are having to pass on higher wage costs to staff and they’re getting higher input costs coming in. They’ve passed those costs on to their customers as best they can but they’re now seeing customers pushing back against those cost increases and so they’re losing business as a result,” Mr Sulicich said.

“That’s starting to cause the SME sector quite some pain. If we do have more rate rises we’re going to see that sector — the lifeblood of the economy — in even more trouble.”

Westpac is still seeing “good demand” in both home and business lending, Mr King added.

“The economy is being squeezed by those interest rate rises … we’re just seeing it’s hard to get this final bit of inflation out of the system,” Mr King said.

“Whether that means we’ll get a rate increase or we live with rates at the level they’re at, time will tell.

“The other piece is the labour market and if we do see some weakness in the labour market maybe we’ll get a different outcome.”

Westpac chief executive Peter King and ABA boss Anna Bligh at the conference.

Mr King was speaking after fresh data showed inflation jumped to 4 per cent in May, higher than expected, raising the prospect of further interest rate hikes.

Mr Sulicich said the cash rate would now either stay higher for longer or potentially even move upward.

“People are doing it tough at the moment and they’re going to find it even tougher. That’s going to cause some real problems,” he said.

“And if we have another rate increase, the people with wealth will do even better. The self funded retirees with plenty of money in term deposits, they’re going to have even more money to spend so potentially that might see more pressure on inflation as well.”

Speaking at the conference a day prior, NAB boss Andrew Irvine said Australians were doing it tough in the downturn but managing well.

“There are real issues that Australians and our customers are having to deal with. The averages are some of the most challenging in 30 years in our economy,” Mr Irvine said.

“Australians aren’t used to living in a country that isn’t growing with really strong economic activity. And while it’s not recessionary … the averages don’t tell the story at all.

“They are a composite of a very diverse country. WA’s economy is growing at 6 per cent. That’s booming. Queensland is growing, with significant inward migration from outside and within Australia, doing quite well. And then southeast Australia, Victoria in particular, that’s doing it tougher.”