Home owners could be slugged with higher mortgage rates as early as next month after annual inflation rose to the highest rate in two decades.
The price of consumer goods and services as measured by the consumer price index rose by 5.1 per cent over the 12 months to March 31.
It was the highest rate of annual inflation recorded since 2001 and well above the 4.5 per cent that most market economists had expected.
Everything from soaring freight costs to labour shortages and the war in Ukraine were blamed for the inflation spike, with prices for essentials such as petrol, housing and groceries leading the squeeze.
And now the Reserve Bank is under pressure to lift rates as soon as Tuesday to cool what looks like an overheating economy.
Economists told The New Daily the case for an interest rate hike next week is indisputable, with EY chief economist Cherelle Murphy arguing the RBA would lose credibility if it failed to act.
“A record-low cash rate of 0.1 per cent is now clearly no longer appropriate for this economy,” she said.
“The Reserve Bank must join other central banks around the world and tighten.”
Not a quick fix
Despite their unanimous conviction that the RBA must lift interest rates, the economists who spoke to The New Daily warned that higher interest rates would not be a silver bullet for the rising cost of living.
This is because rate hikes fight inflation by limiting demand and cannot fix supply issues, which are the main drivers of some of the price increases affecting Australians today.
If mortgage rates were to rise by one percentage point, someone with 25 years left on a $500,000 mortgage who is paying the average variable rate of 2.66 per cent today would see their monthly repayments go up by $271.
Meanwhile, the prices of non-discretionary goods like groceries are far outpacing annual wages growth, meaning most people – and particularly those on low incomes – are suffering falling living standards.
“These are goods households can’t transition away from,” Indeed APAC economist Callam Pickering said.
“Budgets are going to be pretty tight.”
Inflation out of the bottle
Mr Pickering said the inflation genie is now “well and truly out of the bottle”, with even underlying inflation, which strips out volatility, rising 3.7 per cent year on year.
That is far above the RBA’s official target band of between 2 and 3 per cent for underlying annual price growth – and why Mr Pickering said “a May rate hike is almost guaranteed”.
“I can’t imagine they’ll wait to June,” he said.
“If you get a 5 per cent inflation figure then surely you have to hike.”
BIS Oxford senior economist Sean Langcake said the probability of a rate hike on May 3 had gone up considerably, as it was now clear that the RBA’s policy settings were out of step with economic reality.
“We’re still going hell for leather at this point, despite the labour market basically operating at full capacity,” he said.
“Monetary policy has been going with its foot to the floor, and it’s still there.”
KPMG senior economist Sarah Hunter agreed a May rate hike is now more likely, but said “it’s hard to say whether they will go or not”.
“The RBA said in April they wanted to see multiple sets of data. My interpretation of that is they wanted to see wages growth due out in May as well,” Dr Hunter said.
Economist Saul Eslake said the March inflation figure is a “shocker” that will prompt a May hike.
“This really does set up a nasty dilemma for the Reserve Bank,” he said.
“I would think there’s a reasonable case for them to raise rates by 40 basis points in May.”
Spanner in election race
The next rate hike will be the first in more than a decade and could spell disaster for the Morrison government, which has campaigned on the economy and the cost of living.
As previously explored by TND, the last time rates were hiked during an election campaign was in 2007 when John Howard lost to Kevin Rudd.
Shadow treasurer Jim Chalmers claimed the prospect of higher rates punched a hole through Mr Morrison’s claims that interest rates would be lower under the Coalition than under the Labor Party.
“This is a triple whammy of skyrocketing costs of living, rising interest rates and falling real wages,” he said.
Treasurer Josh Frydenberg, meanwhile, blamed global factors for the high inflation figure.
“Australia is not immune from the international pressures driving up inflation,” he said.
Economists had some sympathy for Mr Frydenberg’s position, telling TND that supply disruptions caused by the global pandemic and the war in Ukraine had pushed up prices in Australia – a form of supply-side inflation that was impossible for the RBA to fix.
“The RBA raising rates in May or June … clearly doesn’t have any direct bearing on what happens to global fuel prices,” Dr Hunter said.
But they also said government policies were partly to blame for the inflation spike, particularly because construction-sector stimulus overheated the industry and led to project backlogs and rising prices.
“The government does shoulder some of the blame for pumped-up dwelling construction costs,” Mr Eslake said.
Mr Eslake added that the March inflation data showed price rises had become more broad-based over the past three months.
“While new dwelling construction costs and petrol are the biggest causes, they don’t even account for half of the headline inflation number,” he said.
And because a rate rise will not reduce many of the price pressures, households will be put in an even worse position as interest rates rise.