Today will see the first successive rate hikes by the Reserve Bank of Australia in 12 years.
That, in itself, raises questions as to just how strong the domestic economy has been over this period.
We all know the aggregate growth numbers have been inflated by export demand primarily coming from China. At times of positive overall GDP growth during the Global Financial Crisis, New South Wales and Victoria were actually in recession. Such has been the extraordinary contribution of China and the entire Asian region in supporting Australia’s economy.
This time around, the story is very different. China is itself somewhat on its knees. Though we can expect a return to reasonable growth in the 2% to 5% range later this year and into 2023. That still is not the kind of growth we have seen from China over the past 1-2 decades.
What is happening is a maturity of the China economy that disallows rampant real estate and infrastructure growth. Investment and business activity in China will remain impressive, but less of the nature that really spurred Australia’s commodities in the past.
This is or should be, all part and parcel of the Reserve Bank of Australia’s thinking in addressing the current situation.
The Australian domestic economy will be slowing from a stimulus hangover effect, and higher food and energy prices. The rescue effect of higher commodity prices for the export sector of the economy may well already be peaking, however.
If, as it should have, the RBA had hiked rates steadily over the past year, we would not be in this difficult situation of inflation already having runaway due to covid supply chain disruption, profit margin fattening, government over-stimulus, and of course ludicrously low-interest rates that encouraged extreme risk-taking.
This coming at a time when likely non-interest rate-responsive inflation from the war in Europe, is battering our coastline.
Australian families are going to struggle to make ends meet against higher food and energy prices and a slowing economy simultaneously.
The RBA being behind the curve means rates now have to be aggressively hiked at precisely the wrong time in the economic cycle.
This is the manifest failure of the RBA.
A full year ago when the view here was that rates should immediately begin rising so as not to create this exact situation at this time, the RBA was still and even aggressively declaring that it would not raise interest rates until 2024?
This is an incompetent central bank by any international standard of expected performance from such a privileged institution.
Today, the RBA will raise rates by 25-40 points, hopefully at least 35 points to 0.7%, when in fact it should already be at 2.225%. Then it would be in the position of even considering reducing rates to help families deal with ever higher food and energy prices. And nowhere near as many Australian families would be about to find themselves in considerable mortgage stress.
The RBA encouraged borrowing that stretched the family budget, when I said it would keep rates at near zero until 2024. Families and investors made important decisions based on this harmful banner.
This was by all international standards of central banking an absurd statement.
Now it is hard working Australian families, and in turn the economy, that will be paying the price of these patent central banking blunders.
The RBA has to raise rates to temper inflation and it will have to do so in a declining economy. They have got it all wrong.
Regardless of what happens today, we are in big trouble.
Market insights and analysis from Clifford Bennett, Chief Economist at ACY Securities
