One thing is certain; we won’t get an interest rate rise next month because the Reserve Bank board meets on April 1 and would anyone there want to be known for saying ‘April Fool’ to millions of Australian mortgagees by increasing interest rates to 7.5%?
But it’s also certain that we will get rate rises from the banks larger than the 0.25% of yesterday after the ANZ warned that would have to happen.
In fact yesterday’s lift to a 12 year high of 7.25% could very well be the peak for this official tightening, unless there is a significant worsening in inflation. The next set of Consumer Price Index figures are due out on April 23, so the earliest the bank can again look at rates is at the May meeting.
In fact a small change in the wording of some key parts of the statement after yesterday’s decision suggests the bank may have finished tightening for the time being.
But with a much greater slowing in retail sales than expected (see story below), housing already sluggish, especially for residential building, and falling consumer confidence, the bank will want to see the impact "substantial” tightening in monetary policy has on consumer activity and unemployment.
Unemployment will take time to slow: it’s a lagging indicator and January saw a 33% year low for unemployment of 4.1% at the same time as retail sales stalled over two slowing months in November and December.
Goldman Sachs JBWere and the AMP’s Dr Shane Oliver reckon 7.25% will be the top for this tightening.
But it will be with us for a year or more, unless there’s a significant move in inflation either way, or if a key indicator like retail sales goes negative for a couple of months on end.
There are two senior RBA executives due to speak in Sydney later today: they can be expected to add to the message in the statement issued after the decision yesterday.
The next move will be to see which if any of the banks takes the opportunity to lift interest rates beyond the 0.25% like the CBA did last month. The banks are all wearing an extra 0.40% of higher funding costs as bank bill rates have squeezed past the 8% mark for 180 day paper (8.15%) and to just under 8% for 90 day bills (7.98%).
The ANZ lifted rates 0.20% in January independent of the RBA and yesterday a spokesman said "It’s inevitable there’ll be some flow on to mortgage and other lending rates and we have the added consideration of the ongoing pressures in wholesale markets which have raised funding costs further".
The RBA knows the lift in rates since last August has been substantial.
Last month it said: "A rise of 25 basis points now would produce a total rise over nine months of about 100 basis points for business borrowers and around 90 basis points for housing borrowers.
"This was a significant increase over such a period and much of the effect of it was still to be seen. Additional tightening could be implemented at the March and/or subsequent meetings as judged necessary."
That was after banks had lifted rates independent of the RBA in January and there’s more pressure on them to tack on 0.15% or more to this rate rise to try and steady margins, although their funding is becoming more stable as consumers and corporates move cash into term deposits and other accounts and away from non bank intermediaries.
Now an extra 0.25% is payable by consumers, and whatever the banks tack on. For mortgage holders it could mean a rise of 1.3% or more if the banks add an average 0.15% to 0.20% to the 0.25% from yesterday’s RBA decision.
That’s getting to pip-squeaking in the space of seven and a bit months. That’s why there’s a very good chance rates won’t rise again, or for some time.
Copyright Australasian Investment Review
