Prospect of rate hikes spooks households: Westpac survey
Households are confident the economy is in good shape, but are increasingly worried about higher interest rates.
Leading economists believe the prospect of unemployment at near 50-year lows and inflation pushing towards 5 per cent could force the Reserve Bank into delivering a politically explosive rate rise at its May meeting.
More than one in three Australian households now believe rates will jump by one percentage point over the coming 12 months, as news of runaway inflation in the US and a super-sized rate increase in New Zealand on Wednesday piled pressure on the RBA to act.
In echoes of 2007, when a pre-election rate rise helped sink John Howard’s prospects, economists said RBA governor Philip Lowe’s independence could be at stake if he fails to respond to consumer price growth that is expected to climb above the bank’s 2-3 per cent inflation mandate.
Josh Frydenberg publicly endorsed the central bank’s freedom to act outside of political considerations. “Decisions on monetary policy are those for the independent Reserve Bank of Australia,” the Treasurer told The Australian.
March jobs figures on Thursday are expected to show unemployment dropping below 4 per cent for the first time since 1978.
And the Australian Bureau of Statistics’ consumer price index will be released on April 27, which ANZ predicts will reveal inflation has reached 4.7 per cent for the year to March – the highest since 2008, and up sharply from 3.5 per cent in December.
The RBA’s preferred measure of underlying inflation would jump from 2.6 per cent to 3.4 per cent, ANZ said.
Judo Bank economic adviser Warren Hogan put the chance of a rate rise at the May board meeting at 50-50. “The reality is that the need for an increase in rates is overwhelming,” Mr Hogan said. “There’s no reason to wait, and in fact it would be wrong once the case to hike is there. The longer you wait, the more chance you have to do more later,” he said.
Mr Hogan said the labour force statistics release on Thursday was “really important”.
“If that shows an unemployment rate below 4 per cent, and then we get this high CPI, there is simply no reason to wait,” he said.
The RBA’s cash rate target has been at a record low of 0.1 per cent since November 2020, and the last time rates moved up was in November 2010. CBA has estimated that more than a million households have never experienced an increase in borrowing costs.
Dr Lowe as recently as February made it clear that the RBA board was independent of the political cycle, saying “the federal election isn’t a relevant consideration in our decision making”.
Nonetheless, economists are wary of predicting a May move, especially after Dr Lowe in his most recent statement said the board would wait for “important additional evidence … on both inflation and the evolution of labour costs” that would arrive “over coming months”.
ANZ senior economist Catherine Birch said that “on balance, we are sticking with June as the first rate hike”, saying the RBA would wait for March-quarter wage growth. “But May is not off the cards,” Ms Birch added.
Dr Lowe has made it clear that Australia did not and would not face the same inflationary pressures as the US, where an overheated economy and surging energy prices helped push consumer price growth to 8.5 per cent – the highest for 42 years.
In Britain, new figures released Wednesday evening showed inflation hit a 30-year high of 7 per cent.
Addressing the media on the campaign trail in Victoria, Scott Morrison said damaging inflation in America “highlights … that we are in a very uncertain world”.
“There are inflationary issues in our economy, that is very true and so who you choose to manage the country’s finances at a time like this, they need to know what they are talking about and they need to know what they are doing,” the Prime Minister said.
Also on Wednesday, the Reserve Bank of New Zealand lifted rates from 1 per cent to 1.5 per cent, saying it expected inflation to peak at 7 per cent this year.
Westpac’s consumer sentiment survey on Wednesday showed the prospect of higher borrowing rates after more than a decade of declines slammed confidence among mortgage holders in April.
Households are increasingly worried about the impact of higher interest rates on their finances
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