MNI INTERVIEW: Q2 CPI Could Force RBA To Hike In August

The Reserve Bank of Australia could be forced to hike at its upcoming Aug 5-6 meeting should Q2 quarterly CPI print at 1% q/q or above, a former principal advisor at the Treasury told MNI, noting further hikes could occur later in the year.

Warren Hogan, managing director at EQ Economics, said the recent jump in consumer confidence – likely driven by stage-three tax cuts – and the strong labour market would also add pressure on the board to lift rates next month.

The ANZ-Roy Morgan Consumer Confidence index jumped 5.9 points to 84.4 this week – its largest weekly jump since 2021, but the 77th straight week below the 85 handle. (See chart)

HIGHER RATES NEEDED

Hogan said the current 4.35% cash rate level failed to meet the RBA’s goal of price stability, adding the nominal effect of the hikes to date had faded, and real interest rates remained low.

“Given that I think core inflation next week will be 1-1.1% [q/q], I think it's a 70% chance the board will go in August,” he told MNI. “The real issue is if it goes back-to-back in August and then September, which I give a 50/50 chance.”

The overnight index swap market has given an August rate hike a 26.1% chance.

Hogan’s central case sees the board hiking in August and then November as consumer spending picks up due to the introduction of stage-three tax cuts. (See MNI: Tax Cuts, Fiscal Policy Seen Complicating RBA's Job) If the RBA fails to respond to strong Q2 CPI with a rate hike in August, then questions will arise regarding its priorities and whether they are skewed too far towards employment, Hogan said. (See MNI: RBA's Labour Focus To Keep Rates Lower - Ex Staffers)

“If we don't get a move in August on the back of another 1% inflation number next week, and all the other information, then I think it’s probably not going to move until next year, in which case, it'll be in a situation where the inflation is probably rising, and the economy overheating more than what we've seen and that'll be a real problem.”

The Australian Bureau of Statistics will release Q2 CPI data July 31, ahead of the RBA's August meeting.

THIS TIME IS DIFFERNET

Hogan warned central banks globally will likely not pursue aggressive rate cuts and will take a more cautious approach as they navigate a very different economy due to significant demographic shifts.

“We've spent 50 years worrying about unemployment as a macroeconomic problem,” he noted. “That's not the issue. The macroeconomic story is now one of labour shortages and that defines everything.”

Labour and capital costs will trend higher, while geopolitics will prove challenging and create trade frictions, he added.

“We're now in a supply-side driven, rather than a demand-side, economy after 30-odd years of the consumer having access to credit and being the key driver of the cycle," he argued. "It's a very different economy to anything that we've known.”

This has driven economists' inability to understand the direction of the macroeconomy, he added.

“The reality of all of this is that we're in an inflationary economy and we're in an economy that's going to prove more resilient to circumstances, whether it be rate hikes or geopolitical destruction than we would have had in the past, because labour shortages imply less job destruction and that implies less consumer income destruction at any given point in time.”