OPINION: Rate rises were supposed to start biting this year. But it looks like the Reserve Bank may have to push the cash rate past 4 percent to slow the economy.
The RBA had been hoping that the big increase in the nominal cash rate over the past 12 months would bite into economic activity before inflation took hold in the domestic economy.A fixed-rate mortgage cliff and a high proportion of variable-rate mortgages should have ensured a negative cash flow shock to both households and businesses that would slow spending growth and facilitate a re-balancing of supply and demand in the economy.
Australia’s manufacturing sector is slowing down; the soft landing is happening as desired. But the service sector has been bouncing back in recent months. The Judo Bank Services PMI for May confirms a cyclical rebound in the services economy heading into the winter months. My concern is the signalling effect of an 8.6 per cent minimum wage increase on the rest of the labour force. Even the 5.75 percent award increase is much higher than can be sustained across the economy.Tight labour markets and continuing cost-of-living pressures make this a very real risk.
Despite the RBA’s core inflation forecast being updated just six weeks ago, the recent flow of information all points to upside risk. The ABS monthly inflation indicator for April surprised to the upside, and the Melbourne Institute’s latest Inflation Gauge points to inflation “stickiness”, much like we have seen in other economies in the past six months.Electricity prices are going to rise another 20 per cent in July.
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