The recent rate hike by the Reserve Bank of Australia (RBA) marks the largest tightening cycle since the early 2000s — has the cash rate reached its cyclical peak?

CoreLogic head of residential research Eliza Owen said Eliza Owen said the cash rate is now at 3.10%, the highest target adopted in 10 years.

“The increase follows signaling from the RBA it is committed to tackling the ‘scourge’ of inflation, which has been shown to create lasting, detrimental effects on unemployment if not addressed with a strong monetary policy response,” she said.

Too early to pause?

There are early signs of a slight shift in the Australian economy and further slowdowns are expected as monetary policy start to impact spending decisions.

For instance, retail sales declined through October at 0.2%, the first monthly decline in 2022. Meanwhile, commodity prices continued to ease, as well as supply chain pressures.

However, Ms Owen said there are some indicators pointing to further rate hikes ahead.

“The September quarter ABS business indicators data, released this week, reflected a 2.9% increase in wages and salaries, a growth rate not seen since 2007,” she said.

“In October, labour force data showed continued growth in the number of people employed, and the unemployment rate fell 0.1 percentage points to 3.4%.”

Close to its peak?

AMP Capital chief economist Shane Oliver argued that the RBA is close to its peak if it has not reach it already.

“There is increasing evidence that rate hikes are starting to bite: housing related indicators are all very weak; falling home prices will depress consumer spending via a negative wealth effect; consumer confidence remains at recessionary levels; bank card spending data indicates a slowing in discretionary spending,” he said.

Mr Oliver cited other reasons why the cash rate might already be at its peak, including the following:

  • Global supply bottlenecks are continuing to dissipate
  • While electricity prices likely have more upside, oil and hence petrol prices look to have peaked.
  • Many households will experience a significant amount of pain from the combination of falling real wages and higher mortgage rates.
  • The risk of global recession next year is now high, and this will weigh on imported inflation and further dampen Australian economic growth.

“We see the RBA as being at or close to the peak on rates — our base case is that we are now at the peak, albeit with the high risk of one final 0.25% hike to 3.35% early next year,” he said.

“By late next year or early 2024 we expect the RBA to start cutting rates.”

Unnecessary rate hike

Housing Industry Association (HIA) chief economist Tim Reardon said the RBA will not restore the economy to stable growth by putting the housing industry through boom-and-bust cycles.

“Home buyers have exited the new home market rapidly following the first increase in the cash rate in May — the RBA should have paused to observe the impact of the fastest increase in a generation and not continued to raise rates,” he said.

Mr Reardon said home building was already set to slow significantly in 2023 and this recent rate hike will only worsen the downturn.

“The number of loans for the construction or purchase of new homes has fallen to its lowest level in over three years,” he said.

“The declines were seen in all market segments, with lending to first-home buyers, owner-occupiers and investors continuing to fall in October.”

Mr Reardon said there is material risks to household and business finances from the aggressive cycle is clear.

“A deep and prolonged trough in home building activity will jeopardise the return of the economy to stable growth,” he said.

Photo by Christopher Knutsen from Pexels.