With the Reserve Bank of Australia’s last 2022 meeting just around the corner, investors have been sitting idly by to assess whether Australia has arrived at a restrictive rate, or whether there will be a few more rate hikes early next year. The consensus is for the RBA to bump up the cash rate by 0.25% (25 basis points) to 3.10%.
A pause in the tightening cycle could demonstrate the Aussie’s hunger to lead by example, similarly shown a couple of months ago, where the RBA was the first developed global central bank to downshift the pace of interest-rate increases to 25bps at its past two meetings.
The RBA is currently in the midst of its sharpest tightening cycle, having raised rates by 2.75% since its first hike in May. The RBA has repetitively stated that they aim to bring inflation down to 2-3% on average. They have forecast that CPI will peak at 8% by end of 2022 and then begin to decelerate in 2023. Economists have also reduced their forecasts for economic growth in Australia right through to 2024, reflecting the expected tighter monetary policy. Money markets imply a peak rate of 3.8% next year, while economists expect the central bank will pause at 3.6%. Interestingly enough, futures are pricing in a cash rate of 2.96% for December's meeting which is approximately a 0.15% rate hike. The risk is to the downside if the RBA throws in a sneaky 0.15% hike, which will add to further optimism for Australian equities.
Bloomberg also reported that CBA suggests we're near the peak of the tightening cycle, while Goldman Sachs sees rate hikes persisting into 2023. CBA has estimated one more hike next week to 3.1%, while Goldman predicts five more, to 4.1% in May, so clearly, there is a cash-rate outlook divergence.
We’ve had some interesting data released over the past week, to say the least, including retail sales, monthly CPI, credit and building releases which have demonstrated Australia’s resilience to sticky inflation, and display leading signs of Australia potentially achieving a soft landing, which has added to optimism with the local bourse.
Last Monday, Australian retail sales declined -0.2% for the first time this year, suggesting that households are starting to feel the strain of rising rates and sticky inflation. Although one reading doesn’t form a trend, could this be a leading indicator of consumer sentiment shifting and household spending reduction?
The monthly CPI inflation reading was a huge surprise to the local market, at 6.9% versus 7.6% forecasted, and a trimmed mean of 5.3% versus 5.7% forecasted. Now although this monthly reading doesn’t capture the full extent of inflation inputs, it was a great indicator of how the economy is faring. This is obviously quite positive for Australia, indicating that inflation may be slowing down, but similarly to retail sales, one data point doesn’t form a trend, so the quarterly inflation read will continue to remain key for assessing monetary policy.
It's too late to apologise
It was interesting also to note that Governor Lowe felt like it was the appropriate time to apologise to the Australian public and acknowledge the RBA’s errors in miscommunication with their forward guidance, and how it could be misconstrued by consumers. I mean sure, acknowledging your mistakes is great, but some may ask, is it too late now to say sorry? I guess we’ll never know who and how many people were affected by this call.
On a positive note, Australia does have a strong probability of achieving a soft landing than almost any other developed country according to Governor Lowe, citing that wage growth will be an important indicator. He also suggested that the best outcome for Australia would be for wages to pick up, but not overshoot. “I think that’s achievable. It’s not achievable in many other countries because they’ve already gone past the point.”