With the economy continuing its gradual recovery, the Reserve Bank of Australia decided to keep its interest rate at the record low level of 0.10 per cent at its monthly meeting on May 4.
As usual, the RBA indicated that the cash rate won’t be lifted until inflation sustainably hits its desired range of between 2 and 3 per cent, with wage rises the main driver.
At the moment, inflation is sitting at 1.1 per cent, having risen by 0.6 of a percentage point in the first quarter.
Although the RBA expects a temporary spike in the June quarter, inflation isn’t expected to hit 2 per cent until mid-2023. At the forecast rate of increase, most experts are predicting the official interest rate won’t rise until late 2023 or early 2024.
That smaller-than-expected rise over the first quarter had taken the RBA by surprise, said Martin Whetton, the Commonwealth Bank’s executive director, head of bond and interest rate strategy.
“The forecast was 1.4 per cent so it is 0.3 per cent less than they’d been expecting,” Mr Whetton said. “That’s really weak inflation, both core and headline. Wage growth is trending only at one per cent plus, but we won’t know that figure until later.
“There are signs that things are picking up, especially when some were predicting the collapse of the economy, and we’re making progress in lowering the unemployment rate, but wages are still not putting pressure on inflation. Rents make up a decent chunk of the Consumer Price Index, and we’re starting to see rises in rents and they’ll be fed through in time.”
The last Domain Rent Report in April showed house rents soared nationally by up to four per cent in the year to a new record median high of $471 per week. Rents climbed in all cities except Melbourne, with Perth recording an incredible 14.7 per cent rise, Darwin 14.6 per cent, Adelaide 7.6 per cent, Brisbane 7.3 per cent and Sydney 3.8 per cent. Melbourne recorded a 2.3 per cent drop.
At the same time, house prices have continued their national surge, with Sydney, Melbourne, Hobart, Brisbane and Adelaide hitting new record highs, Perth rebounding fast after years of decline and Darwin recovering ground.
Those growth levels are now, however, expected to slow as more stock comes onto the market and prices become unaffordable for many buyers.
Yet with those kind of rises, wage growth is more critical than ever, and it’s up to the federal government to move to stimulate it, said Tom Hird of Competition Economists Group Asia Pacific.
Overseas, speculation about inflation rates is dominating global financial markets, with markets pricing in a “sustained increase” in US inflation over the next decade after the Biden administration’s multi-trillion dollar spending plans, and here there’s increasing pressure on the Australian government to act.
“That wages growth will eventually come if the government retains an expansionary fiscal policy as we’ve seen some economies do around the world,” said Dr Hird.
“But in Australia that hasn’t been pushed yet, and the ability of the Reserve Bank to provide those expansionary policies through low interest rates is being curtailed if the government doesn’t act. They could lower taxes or increase their spending. They’ve done [the latter] a little with childcare subsidies but they could do more, like continuing Newstart or raising the JobSeeker payment and spending more on infrastructure.”
It might well be that wage growth will come naturally in industries that are doing well, like the property sector, but others such as the COVID-devastated hospitality sector are struggling, said Alex Lambros, director at Loan Market Unlimited.
“Until they show real signs of growth, then wages will lag behind, and the RBA won’t change its rate. The only rates we’ll see changing over the next three to six months are the fixed ones offered by some of the banks.”
Westpac, for instance, increased its four- to five-year fixed rate by 0.3 of a percentage point, and the Commonwealth Bank raised its by 0.25 of a percentage point.