The Commonwealth Bank of Australia is predicting a 50 basis-point hike to the official cash rate on Tuesday, with further increases to follow before the end of 2022.
CBA head of Australian economics Gareth Aird (pictured above), who was speaking to The Australian, said he expected a final 25 basis-point hike in October, which would bring the cash rate to 2.60%, but there was also the risk the Reserve Bank could opt for a 50bp increase.
The recent hawkish speech by US Federal Reserve chair Jerome Powell might feed into the RBA board’s thinking on the outlook for monetary policy in Australia, but the RBA doesn’t need to tighten as much as the Fed, Aird said.
“The rapid pace at which the RBA has tightened policy this year means there’s a degree to which the board is ‘flying blind’ as it’s too early for tier one economic data,” Aird told The Australian.
“This includes unemployment, inflation, wages and GDP to show the impact of the already delivered rate hikes. But tier two data suggests the economy could slow quite materially from here, particularly given monetary policy is expected to be tightened further.”
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Aird said while he felt a case could be made to slow the pace of tightening at the September board meeting on Tuesday and raise the OCR by just 25bp or 40bp, he expected the RBA to raise the cash rate by 50bp as per the consensus call across the forecasting community.
He said if the RBA were to lift the cash rate above 2.85%, it would likely generate a hard landing.
“The crosscurrents in the domestic economic data released over the past month suggest the RBA has a tough task ahead as they seek to normalise monetary conditions in a way that keeps the economy on an even keel,” Aird said.
A stack of economic data in the past month will be examined by the RBA and “the recent hawkish speech” by Powell, delivered at Jackson Hole, might well feed into the board’s thinking on the outlook for monetary policy in Australia, he said.
Aird said that provided the RBA pause for at least a few months in their tightening cycle when the cash rate is 2.60% or 2.85%, the data would indicate that there was no need to continue to take the policy rate higher.
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“There is a large proportion of fixed rate home loans that will expire over the next 18 months. This creates natural tightening even with the RBA on hold,” he said.
Aird said the Australian economy was not in the same place as the US economy.
“We do not have a wage-price spiral, and both inflation and wages growth are running at materially lower levels than in the US.”
Australia also had a much more leveraged household sector than the US and a more direct and potent transmission mechanism from the policy rate to home borrowers, given the structure of its mortgage market, Aird said.
The RBA also had a higher inflation target – 2% to 3% – as compared to 2% for the Fed, he said.
It will be a momentous week for Australia’s finance market, with the RBA board meeting on September 2, RBA governor Philip Lowe delivering a speech to the Anika Foundation on economic outlook and monetary policy on September 4 and a variety of domestic data, including the June quarter national accounts, is due.
