Reserve Bank drinks a witch’s brew of economic woes and orders another round

That’s the bank’s problem.

Keep lifting rates and there is broad macroeconomic impact. Don’t raise rates and there is a broad macroeconomic impact.

Home buyers scream the loudest when their mortgage payments go up. Over a four-month period, repayments on an $800,000 loan will have increased by $770.

But homebuyers account for about a third of households. Those who are in their wholly owned homes, the people who have been experiencing record-low interest rates for the past two years, are finally enjoying an income stream from their deposits.

CommSec estimates that Tuesday’s increase of half a percentage point, if fully passed on by banks, will bring about $6.4 billion in additional revenue.

This witchcraft brew of trouble is one of the reasons financial markets and some economists believe the RBA will continue to raise interest rates this year and early 2023 before doing a reverse fret and cutting rate cuts by the end of next year.

Loading

A major concern, not just for the bank but for ordinary working Australians, is the pace of wage growth.

The RBA has pinned its hopes on a super-tight job market with substantial wage increases. In his statement announcing the latest rate hike, Lowe noted that industry surveys and private chats with companies suggested wages would rise as companies “compete for staff.”

That means the next official payroll data – due out on August 17 – is more important than usual.

Lowe said the size and timing of future rate hikes “will be determined by the incoming data”. If that wage data shows that people’s pay packages aren’t getting fat, the bank may have to hold back any future interest rate hikes.

Tomorrow, and the latest data on the state of the economy, can’t come soon enough for the RBA.

Cut through the hubbub of federal politics with news, opinions and expert analysis from Jacqueline Maley. Subscribers can sign up for our weekly Inside Politics newsletter here.

Leave a Comment