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Question 1. When will interest rates peak and why?
We expect interest rates to peak at 4.6% in the September quarter. With bargaining power currently favouring worker wage demands, the RBA must move quickly to get inflation down or risk a wage price spiral.Two more interest rate hikes from here will be necessary to ensure inflation comes down quickly enough to avoid higher inflation being entrenched. The RBA has been highlighting concerns around inflation expectations; pointing to firms setting prices based on inflation.
In addition, the RBA has been concerned that wages risk becoming indexed to inflation as well, setting up the classic conditions for a 1970s-style wage/price spiral. However, by the September quarter the RBA should have data confirming that inflation has continued to fall, which we expect will be to around 4½% by the end of the year, and this will allow the RBA to stop lifting rates.
Question 2. How will the RBA review influence the Bank’s approach to monetary policy?
By creating a Monetary Policy Board that includes external members with macroeconomic expertise, the RBA will encourage more debate and potentially allow for a nimbler approach. Whether or not this leads to better or more nimble policy decisions will depend on the ability of the Board to reach consensus, which in turn depends on the willingness of the Bank and the Board’s experts to be pragmatic rather than dogmatic.
The communication of monetary policy will also be shared more broadly amongst Board members. Potentially, this may foster more frequent and up-to-date communications from the Bank.
Question 3. Will Phillip Lowe’s term as Governor be renewed?
The self-inflicted damage to Lowe’s credibility and public image means that he is unlikely to have his term renewed and the Federal Government has given little indication that it supports the current Governor. The Prime Minister recently referred to the RBA's faulty guidance when asked about the Budget assumptions being wrong, suggesting that it is top of mind for the Government.
Question 4. Will this September quarter be the most challenging period for households?
Interestingly, the worst phase for households is probably behind us, with real disposable incomes having fallen consecutively over each of the last four quarters. Although many households on fixed rate mortgages will convert to variable rates in the September quarter, and variable rates will be rising as the RBA raises the cash rate, real disposable incomes will be supported by a lift in wages, a slowing in the rate of inflation and support from government subsidies.
However, the recovery in real disposable incomes will proceed at a glacial pace and it will not be until the middle of 2025 (with the help of stage 3 tax cuts over 2024/25) that real disposable income will retrace to the level it enjoyed in the second half of 2021. Hence, the RBA can end its current tightening cycle in the September quarter without fear of prompting a sharp rebound in consumer spending and can begin their easing cycle in the March quarter of 2024.