The market thinks the likelihood of the Reserve Bank of Australia (RBA) lifting interest rates today is 71 per cent.
But economists say people should be cautious when looking at market expectations because they have been wrong before and at some point will be wrong again. In July last year, the market was 96 per cent confident the RBA was about to cut rates. It was wrong.
What do economists predict?
We consulted four leading economists. Here’s what they think in a nutshell:
Nicki Hutley: Rate holdCassandra Winzar: Rate holdWarwick McKibbin: Rate riseRobert Brooks: Rate rise
Independent economist Nicki Hutley says the discussion surrounding interest rates is live, given the uncertainty surrounding the war in the Middle East and recent comments from the RBA’s leadership.
RBA deputy governor Andrew Hauser’s language in a recent interview indicated the central bank was growing impatient with the length of time it was taking to return inflation to its target of 2–3 per cent.
“That said, there’s reason for caution,” Ms Hutley said, “and if I were on the board, I would vote to hold in March and reconsider in May when there’s a bit more information.
“There’s a lot to suggest that consumers are already pulling back.”
But Monash University economist Robert Brooks says he expects the RBA to raise rates today, given the outcome of the inflation crisis that followed Russia’s invasion of Ukraine in 2022.
“The only thing that tempers it a bit is that the last rate rise really hasn’t had a lot of time to factor through, so we don’t really know what that’s done yet,” he said.
Why would the RBA increase interest rates?
Cassandra Winzar, chief economist at the Committee for Economic Development of Australia, says one of the reasons the bank may lift rates is that inflationary expectations are rising. Inflationary expectations are a measure of what people think could happen with inflation.
“They have ticked up recently, and that can be quite concerning because if inflationary expectations are entrenched, that tends to flow through to actual inflation,” she said.
Australian National University economist Warwick McKibbin says the current economic outlook surrounding inflation is similar to when he was on the RBA board around 2006 and 2007.
He says there was an inflation surge, rising house prices, and concern there would be a financial crisis in the United States. And the decision then was to increase rates.
“My view would be to get interest rates where they should be, given the state of the Australian economy, and then once we get more information, respond to the new information,” he said.
Professor Brooks agreed, saying interest rates around the 4 per cent mark represented a more conventional level.
“The interest rate levels we had in the pandemic period were clearly not a normal sort of setting,” he said.
Why would the RBA keep interest rates on hold?
Ms Hutley says the reason to hold rates is the health of the Australian consumer overall, with real wages going backward and household income growth stalling.
“Households are more pessimistic and will be increasingly so because of the Middle East war,” she said.
“Precipitating a rate rise now when you can do it in two months’ time, it just seems to me that caution would be better.”
Professor Brooks says the war in the Middle East is a factor in determining what the central bank decides because there is still uncertainty about whether price increases are temporary.
He says part of the reason for increasing interest rates is decreasing consumers’ discretionary spending, which may already happen due to wider economic factors.
“If every time I go and fill up the car at the petrol station, I’m now spending more money on petrol,” he said. “That’s reducing my other forms of discretionary spending.”
How high are interest rates anyway?
The RBA’s official cash rate is 3.85 per cent.
Banks use the cash rate to set their interest rates — new home loan borrowers will currently pay about 5.5 per cent.
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