Get ready, homeowners! It looks like another interest rate hike is on the horizon, and sooner than you might think! Economists are now leaning towards a potential rate increase as early as March, a significant shift in their predictions, largely influenced by recent statements from the Reserve Bank of Australia (RBA) Governor, Michelle Bullock. She herself has described another hike as a “live” possibility for the upcoming March meeting.
But here's where it gets interesting: Ivan Colhoun, the chief economist at CreditorWatch, has revised his outlook. He's now actively factoring in a 0.25 per cent interest rate increase at the RBA's next gathering, which is just two weeks away. He candidly admitted, “An increase at that meeting is now my base case.” This means the March RBA meeting was, in his view, “very under-priced” by the market. He's now convinced that a further 0.25 per cent rate rise in March is highly likely.
So, what's driving this change of heart among economists? Well, inflation remains a key concern. It's still sitting above the RBA's target band of 2 to 3 per cent, and projections suggest it won't return to that sweet spot until mid-2027. Imagine that – a prolonged period of higher prices!
If a 0.25 per cent increase does happen in March, it would push the official cash rate from its current 3.85 per cent up to 4.1 per cent. That's a noticeable jump for borrowers.
And this is the part most people miss: Governor Bullock also clarified her earlier use of the word “patient.” It turns out she wasn't signaling a pause, but rather that the RBA Board needs more time to gather crucial data. This subtle distinction has big implications.
Both inflation and employment figures are casting a shadow over the economy. Since the February rate hike, the January Consumer Price Index (CPI) data has confirmed the RBA’s concerns about inflation being higher than anticipated. On top of that, the unemployment rate has stubbornly remained at 4.1 per cent, a level the RBA considers to be a bit too “tight,” meaning the labor market is very strong.
Governor Bullock further elaborated, stating that “economy-wide capacity pressures in the economy are also playing a role and, overall, we think underlying demand in the economy is further from its supply potential than we had assessed six months ago.” This suggests that the economy is overheating, with demand outstripping the economy's ability to supply goods and services.
Mr. Colhoun isn't alone in this revised thinking. Kieran Davies, an economist at Coolabah Capital, also believes a rate hike is on the cards for March, rather than waiting until May. He noted, “We narrowly favour the RBA raising rates again this month, or, failing that, a number of policymakers voting to raise rates.”
Coolabah Capital estimates that the RBA’s economic outlook points towards persistent inflation, which could lead to the cash rate being raised to somewhere between 4.25 per cent and 4.75 per cent. However, they acknowledge that the RBA might opt for a smaller increase or even keep rates steady for a longer period.
The RBA Board is scheduled to meet next on March 16-17. They will then skip April and reconvene on May 4-5, just before the federal budget on May 12.
Now, here’s a thought to ponder: With inflation stubbornly high and the RBA signaling a need for more data, is another rate hike the only responsible path forward, or could it stifle economic growth too much? What are your thoughts on this potential move? Let us know in the comments below!
