The RBA hikes again: the top, or just a landing?
The RBA lifted the cash rate another 0.25% to 4.6%, and nobody needed a crystal ball to see it coming. Money markets had priced in a 93% chance of a hike, and all 29 economists surveyed by Bloomberg called it. The cash rate is now at its highest since October 2011, and one more move would take it to levels last seen in November 2008.
For the average borrower with a $700,000 mortgage, this hike adds roughly $110 a month once banks pass it on. Since January, that's about $440 a month, or $5,300 a year. That isn't a rounding error. That's a holiday, a car service and a fair chunk of the grocery bill.
Why the RBA moved again
The RBA acknowledged the economy has slowed, unemployment is rising and house prices are falling. Its view is that none of that has gone far enough. Growth is still running ahead of expectations, business investment is strong, and the labour market remains "a little bit tight." Meanwhile, inflation is coming in hotter than forecast, with upside risks showing up in capacity constraints, energy prices and demand linked to AI.
The underlying problem is still weak productivity. It caps how fast the economy can grow without overheating, so the RBA believes demand needs to stay soft for an extended stretch to get inflation back to target. Higher-than-expected inflation plus risks that are already arriving added up to another hike.
The RBA also kept its foot near the brake. It said it "will continue to do what it considers necessary" to return inflation to target, explicitly including further increases. Markets are pricing another hike by February and a coin-flip chance of one more by June. Australian rates are expected to stay higher than in other major economies, largely because inflation elsewhere is already closer to target.
The case for another hike is real
It's not hard to argue the RBA has more work to do:
Inflation is still too high. Trimmed mean inflation sits at 3.6%, well above the 2–3% target, with no clear downtrend and a worse reading than most developed economies.
Cost pressures are building, not easing. The Fair Work Commission granted a 4.75% rise in award wages and a 6% rise in the minimum wage from July. That points to faster wages growth this year, while productivity is going backwards at -0.2%. Add the second-round effects of the oil supply shock (petrol is climbing again, with no obvious fix to disrupted Persian Gulf supply), an AI data centre boom pushing up construction and materials costs, and business surveys still showing price pressures well above pre-pandemic norms.
The RBA's credibility is on the line. Inflation has been above target in five of the past six years, including this one. The longer that continues, the more people treat it as normal, and that shows up in bigger wage claims and more frequent price rises.
It's not yet clear the economy has cooled enough to bring demand back in line with supply.
Governments are still spending big. Federal spending is projected to sit just under 27% of GDP for the next few years, implying total public spending of around 28%. Both are well above pre-pandemic levels. Growth in public demand has slowed, but it's the level that matters when you're trying to take heat out of the economy.
So the risk of another hike is genuine, and at a minimum the RBA is likely to keep a tightening bias for some time.
…but this may be the peak…
By the November meeting, we expect clearer signs the economy is cooling: sharper falls in home prices, a softer jobs market and rising recession risk. Here's why a second hike, let alone a third, may prove unnecessary:
Mortgage pain is already severe. The share of household income going to mortgage interest is heading back toward the 2024 highs, which weren't far off the pre-GFC peak. That's before the May hike or this one fully flows through.
Petrol is a second squeeze. Current fuel prices cost the average household roughly another $90 a month compared with January.
Falling house prices hit spending. We expect a peak-to-trough fall of around 10%. The RBA's own estimates suggest a fall of that size cuts consumer spending by about 0.8% after two quarters and 1.6% over the long run.
Some borrowers may be near breaking point. More forced sales would add supply to an already weak market, deepen the price fall and amplify the wealth effect.
Unemployment is trending up, which adds to mortgage stress, weighs on spending and raises the risk of more distressed sales.
Consumers are already pulling back. It's early, but household spending was flat in August and fell 0.3% once higher fuel bills are stripped out, in line with weak consumer confidence.
All of this points to slowing demand and rising recession risk, both of which ultimately bring inflation down. A second hike remains a meaningful risk, but the RBA may decide to hold at 4.6% until around mid-next year, with rate cuts possible in the second half of 2027.
That said, rate expectations have swung dramatically over the past year. Plenty of forecasters were too optimistic about cuts twelve months ago. The same crowd may now be too pessimistic. We’ll see.
Rick Maggi, Financial Adviser (Perth), Westmount Financial
_______________________________________________________________________________
Disclaimer
This article has been carefully prepared by Westmount Securities Pty Ltd (ABN 42 090 595 289, AFSL 225715) for general information purposes only. However, neither Westmount Securities Pty Ltd nor any of its affiliates guarantee the accuracy or completeness of any statements contained herein, including any forecasts. Past performance is not a reliable indicator of future outcomes. This material does not consider the specific objectives, financial circumstances, or needs of any particular investor. Therefore, before making any investment decisions, investors should assess the relevance of this information to their individual situation and consult professional advice, taking into account their unique objectives, financial position, and needs.