Recently, some claims about "Australia will raise interest rates three times this year" have spread all over the media, and the fear of the central bank continuing to raise interest rates has caused unease among Australian salaried people and turmoil in the foreign exchange market.
Dr Warren Hogan, who made the remarks, was chief economist at Judo Bank, an emerging Australian bank and previously taught at the University of Technology Sydney.
If Chinese Confucianism is used to judge, this doctor suddenly made a tirade that is harmful to Australia's social stability at a critical juncture when Australia's first-quarter inflation data exceeded expectations, especially after millions of Australian households have endured high interest rates for more than a year.
However, as a secularist country, Australia seems to be contrived by sticking to morality, so it is in the national interest to look at this fact positively from the perspective of economics.
So from the perspective of economics, the money market, and the Treasury market, will this statement of "three interest rate hikes within the year" be more reasonable?
The answer is that these words are equally untenable.
Let's use the latest data to analyze why the probability of three rate hikes this year is very small, and there are three main reasons:
- Australian household consumption has fallen for six consecutive months, and consumption-driven inflation has continued to fall
- It is difficult for the necessary expenditure items (goods and services) of households and households to be regulated by interest rates
- The current state of the mortgage and economy in Australia and the United States is very different, and it is worthless to use the Fed's monetary policy as a reference
Let's start with the first reason, the vertical decline in Australian household consumption.
Australian retail sales data released at 11:30 a.m. on Tuesday showed that retail sales fell by 0.4% again in March, echoing the five consecutive months of declining household consumption, proving that the high interest rate environment and negative real wage growth caused by high inflation have significantly limited the spending power of households and households.
This is evident in the latest Global Economic and Market Research Report released by the Commonwealth Bank (CBA) - from the third quarter of 2022, that is, shortly after the start of the interest rate hike cycle, the consumption level of Australian households and households has gradually declined, and hit the lowest level in the third quarter of 2023.
Inflation is outpacing wage growth, which naturally erodes people's spending power. At the same time, interest rate hikes and adjustments to Australia's tax policy have further limited spending power.
From this point of view, the RBA's monetary policy has played a key role, and from the current situation, there is no need for a rate hike.
Seeing this, some people will definitely ask: since it has played a key role, why does inflation rise instead of falling?
This is our second reason: the necessary expenditure items of residents and households do not fall, pay attention to the key word, which is "essential consumption".
So what does essential consumption consist of, and what does the non-decline in the cost of these items have to do with interest rate hikes?
Let's take a look at what these projects are.
According to the rules of the Australian Bureau of Statistics (ABS), the most stubborn items of "essential consumption" are: the cost of building a house, rent, insurance and education.
If the surge in the cost of building a house is the "hard scripture" for most wealthy Australian families, then the high rent is the Achilles heel of the younger generation of Australians.
It is not only the chronic shortage of construction workers and materials that has caused the surge in the cost of building houses, but also the construction of civil engineering projects by the Australian state government, which has further increased competition for resources and fiscal spending on the other, which is also driving a rebound in inflation.
The age-old issue of rents is even more stubborn, as the lack of housing supply and record-breaking net immigration arrivals (500,000 arrivals last year) have exacerbated the rental crisis, while rising interest rates have caused landlords to pass on most of the new mortgage costs to tenants, creating a vicious loop – the more interest rates rise, the higher rents.
Then there is the increase in insurance costs, the increase in the cost of building a house has naturally led to the rise of insurance costs, coupled with some natural disasters caused by climate and environmental changes, which have also pushed up insurance costs in some areas.
Quoting the RBA's statement in February, the issue becomes abundantly clear: "The problem facing the insurance industry (rising prices) is industry-specific, and [our] monetary policy cannot be difficult to intervene effectively, and this requires government policy intervention." ”
The last stalemate is the cost of education, which is classified by the Bureau of Statistics as essential for pre-school, primary, junior and senior high schools, and only tertiary education is non-essential.
So the problem is very simple, whether it is housing, renting, insurance or education, it is not something that ordinary Australians can say that they will not consume if they do not consume.
It's not about will, it's about survival and development.
In other words, continuing to raise interest rates will not bring inflation back down by stifling demand for essential consumer goods and services. If the RBA insists on going its own way, the displacement of more residents, the lack of basic education, or the lack of insurance, will become a huge time bomb that undermines the stability of Australian society.
Therefore, raising interest rates 3 times, and raising interest rates 3 times within the year, is a self-destruction of 200 enemies.
The last factor, which many economists like to refer to the most, is the change in the Fed's monetary policy.
Yes, the Fed's policies have a huge impact on central banks around the world in terms of trade, capital flows, and the cost of financing Treasury bonds, but it is definitely not the only variable.
First, the strength of the labour market in the US is much higher than in Australia, with the latest non-farm payrolls (NFP) data again significantly exceeding expectations, reaching a staggering 303,000. By contrast, employment in Australia has been sluggish for a long time.
Second, while Australian household consumption has been declining for six months, US household consumption has continued to rise. It is worth noting that consumption accounts for about 70% of the total output value of the U.S. economy, so the continuous rise in consumption will inevitably be imported into inflation, so it is understandable that the Fed is anxious.
Third, residential mortgages in the United States can be locked for up to 30 years, while Australia usually only has 4~5 years. In this way, the RBA's interest rate hike has far more impact on Australian loan households than US households, so it is also understandable that the Fed will raise interest rates more frequently and at a faster pace than the RBA.
As a result, there is a huge difference between the RBA and the Fed's monetary policy considerations, and interest rates are a consequence, not a cause.
In summary, "raising interest rates three times to 5.10% this year" is a very unlikely event, especially considering the optimistic factors such as the situation in the Middle East has stabilized in the near future and the prices of the two oil have begun to fall.
The RBA will maintain the current interest rate for a long time and cut it in the fourth quarter of 2024 or the first quarter of 2025, which is the most factual and logical speculation.