The Reserve Bank’s decision to raise interest rates to a fresh decade high in June was “finely balanced”, with fears inflation will fall too slowly ultimately pushing central bankers towards another mortgage squeeze.
Meeting minutes published Tuesday confirmed the RBA is concerned its plan to bring inflation back to target by mid-2025 will be derailed by a combination of stubbornly high services, prices and rising wages growth.
The latter is caused by lacklustre productivity, which the RBA wrestled with in June, noting output per hour worked hasn’t increased since 2020.
“The recent data suggested that inflation risks had shifted somewhat to the upside,” RBA board minutes, published on Tuesday morning, said.
“Given this shift and the already drawn-out return of inflation to target, the board judged that a further increase in interest rates is warranted.”
The minutes provided no direct clues about where the RBA will land at its upcoming August meeting in a fortnight, but many economists are expecting back-to-back mortgage bill increases after the June decision.
That’s because factors that pushed the RBA to a June hike, a move that surprised many economists, are likely to continue in the coming months.
This includes the likelihood that inflation for key services – especially essentials such as energy bills and rent – will slow plans to cool inflation.
Secondly, while wages growth to date is still “consistent” with inflation returning to RBA targets by mid-2025, this would require productivity to rise back to pre-pandemic levels – something experts think is unlikely.
“While future trends in productivity were uncertain, the outcomes over recent times had been disappointing,” the latest RBA minutes read.
The RBA also discussed the possibility that businesses could raise prices even higher merely because inflation has been high recently.
“Members discussed the possibility of implicit indexation of wages to past high inflation and the potential for this to become widespread.”
“Similarly, members observed that some firms were indexing their prices, either implicitly or directly, to past inflation.
“These developments created an increased risk that high inflation would be persistent, which would make it more difficult to keep the economy on the narrow path.”
National Australia Bank, Commonwealth Bank and Westpac are now all suggesting rates could rise to 4.6 per cent in coming months, which implies two more mortgage bill increases in July and August.
Such moves would add about a further $150 to monthly repayments on a typical $500,0000, 25-year home loan and would throw thousands of families across the country into mortgage stress, according to recent figures.
Westpac is now forecasting a per-capita (population adjusted) recession in 2023 amid rapidly rising interest rates, as well as a negative quarter of GDP growth early next year – though an outright recession is unlikely.
