The cash rate is expected to rise for the first time since the end of a pandemic, spelling doom and gloom for the government in the run-up to federal elections.
One of the nation’s most respected economists has warned of an immediate series of rate hikes that will rise “more aggressively than initially thought likely” after dismal new inflation data released today.
Major banks and financial institutions are asking the Reserve Bank to raise the target cash rate next week, up to 0.5 percent, an increase of 0.4 percent, after CPI data released today. show a record annual inflation rate of 5.1 percent.
It would be the first time since 2007 that the central bank has raised rates during a federal election campaign, which the current Howard administration lost.
Stream more financial news live and on demand with Flash. More than 25 news channels in 1 place. New to Flash? Try 1 month free. Offer ends October 31, 2022 >
AMP Chief Economist Shane Oliver says he expects the RBA to raise rates next week to 0.5 percent.
“We now expect the RBA to start rising at its May meeting next week and by 0.4 per cent, which will take the cash rate to 0.5 per cent. The latest burst of inflation adds significant pressure on the RBA to start raising rates immediately and to do so more aggressively than initially thought likely.”
“A 0.1 percent cash rate target is inappropriate in this context,” say the ANZ economists.
“There is a clear risk that the RBA will raise the cash rate at the May board meeting next week. In fact today’s inflation data indicates that the RBA should raise the cash rate,” says Gareth Aird, head of Australian economics at Commonwealth Bank.
“These figures are well above the RBA’s inflation target of 2% to 3%, so a cash rate hike next Tuesday is now very likely. If the RBA doesn’t change the cash rate next week, it could be accused of letting an election get in the way of what the numbers tell it to do,” says Effie Zahos of Canstar.
A rise in interest rates next week would almost certainly cause mortgage and debt payment costs to rise.
This would be only the second interest rate increase during an election campaign and could spell doom for the current coalition government as voters go to the polls burdened by heavier loan repayments and pressures from rising cost of housing. lifetime.
Consumer prices rose 2.1 percent during the March quarter, with the annual increase now at a more than 20-year high of 5.1 percent, easily outpacing what the market expected on Wednesday.
Treasurer Josh Frydenberg said the figure was a reminder that Australians were living in a “complex and volatile economic environment” and pointed to the war in Ukraine as a key reason fuel prices, for example, rose 11 percent. hundred.
A rate hike next week would run counter to doubts previously expressed by the RBA, most recently in the minutes of its early April meeting.
“In the coming months, important additional evidence will be available both on inflation and on the evolution of labor costs. In accordance with its announced framework, the Board agreed that it would be appropriate to assess this evidence and other incoming information as it sets policy to support full employment in Australia and inflation outcomes consistent with target,” the Board minutes read. .
The Commonwealth Bank said it believes the RBA will not raise rates next week.
“If the RBA raises the cash rate at the May Board meeting next week, they will have gone back on what they said last week, namely that the Board agreed it would take into account evidence of both inflation and of the evolution of wage costs as it progresses. set the policy.”
The ANZ admitted there may still be a chance of this, but said it still believes the RBA will raise the target next week.
“We are aware that the RBA’s April meeting minutes highlighted a desire to be ‘consistent with their announced framework’ and await data on ‘labour cost developments’ before moving. Therefore, the RBA could still wait for the labor market data and make its first move in June.”
However, David Plank, Adelaide Timbrell and Arindam Chakraborty, the ANZ economists, predicted the target cash rate to be 0.5 percent by the end of June.
“May’s move will likely be followed by a 0.25 percent hike in June, bringing the cash rate to 0.5 percent.
“Regardless of whether the RBA’s first move is in May or June, we expect the cash rate target to be 0.5 percent in early June.”
A rate increase could deal a serious blow to the Coalition’s re-election chances. In 2007, then Prime Minister John Howard was forced to apologize for raising the rate three weeks before the election he later lost to Kevin Rudd.
“I would say to Australia’s borrowers who are affected by this change that I’m sorry about that and I’m sorry about the additional burden that will be placed on them as a result,” Howard said at the time.
Reserve Bank Governor Philip Lowe has previously said he considered it “appropriate” not to raise rates at this time.
“The approach that we are running right now, waiting for the evidence, risks inflation being above 3% for a period of time and that risk is acceptable; we believe that taking that risk is an appropriate thing to do. ”, he said in February.