Friday, December 09, 2022

Inflation set to accelerate growth rate –

Economists are generally confident that the Reserve Bank of Australia will remove the cash rate at Tuesday’s monthly board meeting, the first increase in more than a decade.

There has been a marked shift in thinking on the interest rate outlook in the past week after inflation data turned out to be stronger than expected.

Annual inflation rose to 5.1 percent and the more interest rate-sensitive underlying inflation rate rose to 3.7 percent — well above the RBA’s two to three percent inflation target.

St George’s associate economist Jameson Combs said the RBA can’t wait to raise rates.

“Once the genie is out of the bottle, it is extremely difficult to control inflation and last week’s data is an indication that the inflation genie is rearing its head,” he said.

The financial markets as a whole are priced at a 0.15 percent increase in the cash rate to 0.25 percent and are expected to increase by 0.25 percent in the months that follow.

But not all economists are on the move with this meeting, especially in the middle of a federal election campaign.

“The RBA is independent and there is no doubt that it will be well suited to achieve its mandate,” said HSBC chief economist Paul Bloxham.

“But raising the cash rate 18 days before the election – the first hike in a decade – would put the RBA into the political mix.”

He believes it would be better to move to 0.5 per cent from 0.4 per cent in June and by then the central bank will look at the latest wage hike figures on May 18.

The last time the cash rate was increased was during an election campaign in 2007, a pre-election Liberal Prime Minister John Howard lost after campaigning on lower interest rates under his government.

Prime Minister Scott Morrison is putting on a brave face, but Liberal campaign ads have historically pointed to lower rates under coalition governments than under Labor.

“The independent Reserve Bank should decide where the cash rates are fixed,” he told reporters during the campaign on Monday.

But he said it is not about politics, it is about what people pay on their mortgage.

“That’s what worries me. I mean, sometimes you guys always look at things through a purely political prism. I don’t. And Australians don’t.”

An initial rate increase of 0.15 percent would increase repayment on a $500,000 convertible mortgage by about $45 per month, but if the cash rate rises to 1.25 percent, as some economists predict, it will increase to about $350 per month. .

Ahead of the RBA board meeting, the weekly ANZ-Roy Morgan Consumer Confidence Survey is released, which will capture the impact of last week’s inflation data and the potential for higher interest rates.

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