RBA to deliver more rates pain as economy continues to boil

The latest data reveals the RBA’s big guns have had little impact in taking heat out of the economy.

Interest rates in Australia are rising at their fastest pace in a generation but cooling the economy and prices could be a bigger task than anticipated.

Things remain red hot around hiring, consumer spending, and more recently, even the temperature around wages growth has risen.

Enormous company dividends are also set to be paid out over the next month, stoking activity. Business confidence and conditions are up.

All this points to a fourth consecutive 50 basis point increase in the official cash rate at the Reserve Bank of Australia’s September 6 policy meeting.

Few thought such aggressive tightening was possible at the start of the year, but Australians now face the fiercest rise in rates since 1994, when the cash rate jumped 275 basis points over five months.

But there is a big difference between now and then.

In 1994, the RBA moved early to head off inflation before it became a problem. RBA Governor Bernie Fraser was fond of telling people his job was to remove the punch bowl just as the party was getting going.

But in 2022, the RBA is raising interest rates reactively, having largely failed to see inflation approaching.

That failure to act earlier could well be the catalyst for rate increases that dwarf those in the 1990s.

The latest data reveals the RBA’s big guns have had little impact in taking heat out of the economy.

Consumers are acting as if nothing has happened.

Australians are still spending vigorously, drawing on savings built during Covid-19 lockdowns. Picture: NCA NewsWire / Jeremy Piper

Data on Monday showed retail sales data for July rose 1.3 per cent from June, easily beating the expected rise of 0.3 per cent.

So much for the theory consumers would be restrained by rising mortgage stress and the pain of rising living costs more broadly; Australians are still spending vigorously, drawing on savings built during Covid-19 lockdowns in 2020 and 2021.

Many consumers aren’t feeling more pressure from their mortgages as fixed-rate loans insulate them from higher RBA rates, at least for now.

On the jobs front, unemployment is at a 50-year low of 3.4 per cent and data show there are more job vacancies than there are job seekers. Wages growth is also heating up with a survey by job search engine SEEK shows salaries in July rose 4.1 per cent from a year ago, confirming that employers are responding to a scarcity of workers.

“Unlike previous labour market booms, such as the mining boom, this is not a situation in which some parts of the country pull ahead much more rapidly than the rest. The labour market has been almost uniformly strong,” said Matt Cowgill, senior economist at SEEK.

But consumers aren’t the only ones doing well. Businesses are also reporting strong conditions.

Business confidence rose 5 index points to +7 points in July, while business conditions rose 6 index points to +20 points, according to the National Australia Bank’s latest business survey.

Demand is not a problem in the economy, and the RBA is keenly aware of what that means for interest rates, especially when the decision to tighten the policy screws was taken late.

The RBA has so far moved quickly to combat inflation, which is expected to rise toward 8 per cent this year, but it has plenty of work ahead of it.

The official cash rate is widely expected to head toward 3.0 per cent by year-end from 1.85 per cent now, but there’s still no guarantee that will be enough to brake runaway prices.

Dow Jones newswires