As the Reserve Bank of Australia (RBA) gears up for its first policy meeting of the year, a fierce debate brews among economists regarding the anticipated cash rate hike. While a majority predict an increase from 3.6% to 3.85%, a growing faction warns that such a move could jeopardise the nascent recovery in the economy that has only recently begun to show promise.
A Broad Consensus, But Unease Lingers
The overwhelming expectation is for the RBA to raise rates at its upcoming meeting. Recent inflation data has led many analysts to believe that action is necessary to curb rising prices. However, a counter-narrative is emerging, spearheaded by firms like Goldman Sachs, Deutsche Bank, and AMP, who argue against this consensus.
Diana Mousina, deputy chief economist at AMP, describes the situation as a “close call,” putting the likelihood of a hold at 50%. Despite the discomfort of swimming against the current, she firmly believes that hiking rates could derail the fragile recovery observed over the past two quarters. “If we hike rates, we risk undermining the private sector recovery,” she cautions.
Moreover, she points to emerging data that suggests moderation in key inflationary sectors, such as rents and durable goods. While the quarterly underlying inflation rate may appear high, Mousina argues it is not alarmingly so, asserting, “A rate hike is just not necessary for our economy at the moment.”
Labour Market: An Underlying Concern
Stephen Koukoulas, managing director at Market Economics, echoes Mousina’s sentiments, advocating for a hold on rates. He acknowledges that while a rate hike is “clearly on the table,” there are deeper issues at play. The unemployment rate saw an unexpected drop to 4.1% in December, suggesting a dynamic job market. Yet Koukoulas warns that this figure hides a more troubling reality, with no tangible evidence of wage growth to support claims of an overheating labour market.
He notes, “If you’re worried about an overheating labour market, I don’t think we are seeing it right now.” The backdrop of global economic uncertainty, amplified by shifting conditions in China and erratic financial markets, adds to the complexity of the decision facing the RBA.
The Global Context: Diverging Paths
Phil O’Donaghoe, chief economist at Deutsche Bank, further complicates the picture by emphasising how a rate hike could set Australia apart from global trends. Most central banks worldwide are leaning towards easing rates, yet Australia’s decision could defy this conventional wisdom. O’Donaghoe highlights the absence of a mining boom or other compelling reasons to follow a divergent path, warning that a premature rate hike could necessitate a quick reversal down the line.
He remarks, “Certainly, there is no Australian mining boom to point to at the current juncture,” emphasising the need for caution in this unpredictable landscape.
Why it Matters
The RBA stands at a critical juncture, facing pressures to act against inflation while being acutely aware of the fragile economic recovery. A rate hike could potentially stifle growth, impacting everything from consumer spending to business investment. With the global economy in flux, the RBA’s decision will not only influence Australia’s financial landscape but may also send ripples through international markets. As the board deliberates, the stakes have never been higher—will they risk disrupting the delicate balance of recovery, or will they choose to tread carefully in uncertain waters?
