Source : BUSINESS NEWS
Interest rates need to go higher if the nation is to get on top of its inflation problem, according to a panel of leading economists.
As the Reserve Bank of Australia board prepares to meet early next week, a panel of nine private sector and academic economists has backed a lift in the official cash rate to 4.6 per cent.
In a significant shift from early August when it thought the cash rate should be held at 4.35 per cent, the RBA Shadow Board, which is convened by the Centre for Applied Macroeconomic Analysis at Australian National University, now thinks a rate hike is the most optimal move.
And, in a grim prospect for borrowers, the panel attaches significant probability to the likelihood that rates stay higher well into 2027.
Stubbornly high inflation, robust household spending and concerns about the knock-on effects of soaring fuel prices from the Middle East conflict have contributed to the change in view.
Markets have all but locked a rate rise into their calculations, putting the odds of 29 September hike at 90 per cent, and have priced in a further increase to 4.85 per cent by next March.
This follows official readings showing underlying inflation remains well above the central bank’s 2 to 3 per cent target band despite signs that the economy is slowing, house prices are moderating and conditions in the labour market are loosening.
Markets have also responded to Reserve Bank governor Michele Bullock’s more hawkish tone on inflation, where she has flagged that the central bank would accept greater unemployment in order to reduce price pressures.
A further rate hike would compound the pressure on households already grappling with the impact three rate rises, rising living costs and soaring fuel prices. A Westpac-Melbourne Institute study has found that sentiment regarding family finances has deteriorated. Despite this, measures of actual household spending have increased, suggesting weak household confidence is yet to translate into reduced consumption.
Shadow Board member Begona Dominguez, professor of economics at the University of Queensland, recommended that the RBA hold the official cash rate steady for now while it assesses the impact of the three rate rises implemented so far this year.
But Sydney University economist Mariano Kulish said that although there were signs of slowing activity, the fact was that inflation remained too high and the central bank should act to tighten monetary policy.
“The cost of erring slightly too tight is smaller than the cost of [monetary policy] proving insufficiently restrictive and allowing above-target inflation and inflation expectations to become entrenched,” Professor Kulish said.
Centre for Independent Studies chief economist Peter Tulip was blunter, arguing that the likelihood of sustained above-target inflation made the decision to raise rates “a no-brainer”.
