RBA rate rises: don’t count on more this year despite the data
This seemingly crazy call comes despite many economists now predicting two or more RBA increases in the coming months.
Today I’m going to try some mind games with financial markets, and try to see through the reverse psychology tactics of the Reserve Bank of Australia.
There will be no more interest rate rises by the RBA this year. There. I have spoken.
This seemingly crazy call comes despite many economists now predicting two more RBA increases in the coming months, amid more pressure from last week’s stronger-than-expected employment data.
Financial markets are pricing in a 25 per cent chance of a third extra rate rise before the end of 2023 – a scary thought for many battered borrowers.
So why would anyone predict we may have seen the last rate rise, with all this data suggesting more increases looming?
The number one reason is that we should not believe everything that financial markets and economists predict.
A year ago, the experts’ expectations were that the RBA cash rate would top out at 3 per cent, and that’s been shot to pieces.
Also, two large pieces of economic data will be released before the RBA next meets on July 4: the monthly Consumer Price Index indicator on June 28 and retail trade data for May on June 29.
Annual inflation has been dropping back, from 7.8 per cent in the year to December 2022 to 6.8 per cent in the year to April 30. A sharp fall during May would give the RBA room to pause, and potentially leave rates steady as the pain of recent rises smashes households.
The retail trade data could potentially be a shocker too. This is where the vibe comes in, and the vibe has been bad in the past six weeks.
I’ve heard from several sources across different areas of business that sales have slumped dramatically since the start of May. Down about 20 per cent year on year, like a sledgehammer on their profits just as wage costs surge.
Several finance commentators have voiced similar observations, and if this appears in the upcoming retail trade figures, there’s a good chance the RBA doesn’t move.
I reckon the RBA tries reverse psychology on us. It doesn’t want to inflict more pain on millions of borrowers, but it says it is going to do it so we stop spending, which ideally will rein in inflation.
However, some economists say the RBA will be forced to continue lifting rates because when it last paused, back in April, property prices bounced back strongly – suggesting there is still spare money to be spent by many Australians.
Consumer confidence data is already at its lowest level since the recession of the early 1990s, and many households are yet to feel the full brunt of RBA rate rises because they took out two-year fixed rates near 2 per cent a couple of years ago. They are facing a 4 percentage point rate rise in one big whack when their loan reverts to variable rates this year.
While rates may keep rising in the months ahead, at some point soon consumers will capitulate and stop spending – possibly heralding a recession, like New Zealand is now suffering.
I’ll stick my neck out and say the capitulation is already here and rates won’t go higher, and hope that my neck is not resting on a chopping block.
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