In recent weeks, Deputy Governor for the RBA, Andrew Hauser, has been preparing the way for the RBA to hike rates. Back at the beginning of the month. On 2 September, when the GDP numbers for the second quarter came out, they showed a growth rate of 2.1%. Andrew Hauser at that time said that he thought that growth was too fast and that for the RBA to reach its targets, growth would have to slow down. This suggested of course, that rates may need to move to do that slowing.
More recently, on 9 September, Andrew Hauser was quoted as saying that” inflation is too high and that is why we raised rates three times at the beginning of the year. And the question for us now, frankly, is have we done enough and is more needed?”
We can see the problem that the RBA has got with the level of core inflation. Their preferred measure is the trimmed mean, and the trimmed mean has been stable now for some months at 3.6%.
So they need to put rates a little bit higher if that inflation number is going to go down to their target of 2.5%
When we look at Australian inflation, inflation has a structural problem within the non-tradable components of the Australian CPI. These tend to be things produced by the government sector . Things like electricity and education. For the year to July, non-tradable inflation was 4.4%, whereas the tradable components, like the price of petroleum that Jim Chalmers keeps blaming for inflation, increased by only 1.7%.
Still, the RBA has only one form of policy that they can change, and that's interest rates. To get inflation down, they must act to put up rates.
Our model of the Australian cash rate is based on a presentation in 2015 that the then Deputy Head of the Federal Reserve, Stanley Fischer, gave in San Francisco. It was a model of the Fed funds rate based on inflation, unemployment and inflationary expectations.
Our model of the Australian cash rate has a similar structure, and the model tells us, based on data currently available yesterday, that one hike is certain, two hikes are likely and three hikes may be possible.
Our model estimate on 27 September stood at 5.15%. That's just three rate hikes higher than the current Australian cash rate of 435 basis points. Now, the Federal Reserve has just increased the Fed Funds rate by 25 basis points, and they have suggested in their Summary of Economic Projections that they will increase the Fed Funds rate again by the end of the year.
This suggests that the Fed will put up the Fed Funds rate again at the meeting on 9 December. The reason they would choose 9 December is that it is after the mid-term elections.
What we think is that the RBA will follow a similar path to the Fed. As the Fed walks up the Fed Funds rate.
This suggests that the RBA will increase the cash rate by 25 basis points on 29 September.
They should then raise rates again, most likely at the RBA meeting on 8 December.
This would take the Australian cash rate to 485 basis points by the end of the year.
We may see, based on what our model tells us today, an even higher rate in the future.
Hopefully, it will take a more relaxed approach ahead of the festive season.
Want to discuss how this impacts your portfolio?
DISCLAIMER: Information is of a general nature only. Before making any financial decisions, you should consult with an experienced professional to obtain advice specific to your circumstances.
.jpg)
