RBA to rise 25 basis points tomorrow, says AFR Economics Editor – Christopher Joye

The RBA will rise by 25 basis points tomorrow, according to the Australian Financial Revieweconomics editor John Kehoe, raising the target overnight rate to 60 basis points. Kehoe further asserts that the RBA will continue in 25 basis point increments until it reaches 110 basis points in August, after which it will be revalued. It all seems like very sensible stuff. This is also the second time in the past few days that Kehoe has delivered what appears to be a message on behalf of Martin Place to actively recalibrate expectations (see the first post here).

Kehoe’s 25bps call stands in stark contrast to other hawks in the media. Legendary Australian columnist Terry McCrann is pushing for a 40bp to 65bp hike and has been incredibly critical of the central bank – marking a notable shift from his historic support for the RBA. And then we have Centralbankintel founder Sophia Rodrigues, who was equally hawkish and argued for a 40 basis point hike in June. It should be noted that McCrann wanted a bigger upside in May (although it was early to call May) and Rodrigues didn’t expect a upside in May, pushing for June instead.

Kehoe’s key argument, which I support, is that the RBA wants to send a “business as usual” signal. To quote AFR directly:

The Reserve Bank of Australia will likely raise the cash rate by 0.25 percentage points on Tuesday, even though money markets are betting on a bigger hike. RBA Governor Philip Lowe said last month that a 25 basis point increase was a “signal that we are back to business as usual”…
Lowe’s stated preference just five weeks ago was for conventional changes of 0.25 percentage points. Since then, the March quarter GDP result has been strong. Wage and earnings data was mixed. Three or four rate hikes in successive months would bring the cash rate to just over 1% by August and allow the RBA to reassess the monetary policy outlook in the second half of the year. .

The RBA’s monetary policy mechanism is exceptionally powerful in Australia, with most borrowers having floating rate loans or short-term fixed rate products that convert to floating rates within two to three years.

We have highlighted that house prices are already falling quite rapidly in the two largest cities, Sydney and Melbourne, with auction resolution rates over the weekend continuing to deteriorate. CoreLogic reports that the national clearance rate is expected to fall below 60% for the second week in a row after the preliminary printed estimate of 62% (from 71% a year ago).

In Sydney, conditions appear to be in free fall with a preliminary clearance rate of 59% (down from 76% a year ago), which will almost certainly be revised downwards once final figures are known. We have repeatedly argued that after the first 100 basis points of RBA hikes, national home values ​​would fall by a record 15-25%, albeit in an orderly fashion. And we remain optimistic about the resilience of the Australian economy.

Auction clearance rates are plummeting

Kehoe noted that while GDP was strong, data on wage growth was mixed. It is also clear that Australia’s high inflation rates are currently driven by supply-side influences. With a sharply turning housing market and no current evidence of a price-wage spiral, the RBA has plenty of time on its side, even if it wants to take the cash rate to 150-175 basis points by the end of the day. end of the year.

Another interesting facet of current interest rate market pricing is the huge disconnect between variable rate (or floating rate) and fixed rate pricing. Last week we saw Victoria borrow $4.4 billion at 1.3% for 8-year variable rate money, compared to the 4% and more they would have to pay if they borrowed through fixed-rate products. fixed rate. Queensland borrowed a further $500 million through floating rate products on Friday. Almost all of these bonds were sold to banks seeking to build up their high-quality liquid assets.

Households are in the same situation: discounted variable-rate mortgages cost around 2.25% compared to 4.5% for fixed-rate loans over 3 years. So there is potential arbitrage for borrowers if interest rate markets, which boldly assume the RBA will raise its cash rate north of 3.5%, get it wrong. There is a case where a lack of liquidity in the interest rate markets since the RBA blew up the interest rate doves in November last year has exacerbated current misconceptions about the trajectory cash rate future…

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