RBA likely to move to quarterly tightening in 2023

Pendal

December 2022

THIS week's 25-point rate rise probably won't be the last — but the Reserve Bank's pace of tightening is likely to move from monthly to quarterly increments next year.

The cash rate will now sit at 3.1% for the summer. The RBA's next monetary policy statement is due on February 10.

Between now and then we will see fourth quarter inflation data released on January 25.

It will be high. The annual headline inflation rate will be around 8% for 2022.

This will set the case for another hike in February.

Tuesday's RBA statement contained nothing new. The central bank remains data dependent while the global outlook has deteriorated.

Domestically the labour market remains tight. Economic growth has been strong and household spending will start to slow due to policy tightening delivered so far.

For some this is yet to occur, given the higher-than-usual number of fixed-rate mortgages that are yet to reset.

This is the reason why the RBA doesn't need to be as aggressive. Fixed-rate mortgages at rates around 2% will be resetting closer to 5.5% mid next year.

The RBA acknowledges they are walking a tight rope.

"The path to achieving the needed decline in inflation and achieving a soft landing for the economy remains a narrow one."

The further they push policy, the harder the landing becomes.

The RBA doesn't want to cause a recession. But given a choice of embedded higher-inflation expectations or better growth, the former wins out for any central banker.  

The longer-term task is no simpler.

Policy action to date "has been necessary to ensure that the current period of high inflation is only temporary", the RBA statement said. "High inflation damages our economy and makes life more difficult for people."

In a speech late last month RBA governor Phil Lowe pointed out that variability in inflation outcomes was more likely to increase than what we've become accustomed to.

He cited four key areas where supply issues in the longer term will occur:

1. Reversal of globalisation
2. Demographics
3. Climate change
4. The energy transition in the global economy.

The RBA has under-shot or over-shot its 2-3% target band more often than not over the past 15 years.

More variability in inflation outcomes? Who would want to be a central banker.

Central banks have tightened policy significantly over 2022 — and that will weigh on demand over 2023.

The current Christmas spendathon — where we are let loose for the first Christmas in three years — will hold activity up for now. But it's unlikely continue into the new year hangover.

The supply side of the global economy is also likely to see capacity increase and downward inflationary pressure next year.

The supply issues that have resulted from the pandemic and Russia's invasion of Ukraine will resolve over time.

But with it comes another set of challenges. And those are more likely to be skewed towards higher inflationary pressure in the longer term.

Author: Steve Campbell, Head of Cash Strategies

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