Chapter 1: What is the main topic discussed in this episode?
Music and more. Music and more.
If I had to pick one word to describe America's history in the Middle East, I'd probably go with mistake. But it was the Americans believe all a dreadful mistake. The backpackers crossed the poorly marked border by mistake. The war in Iraq was a big, fat mistake. So why is it happening again? I'm Matt Bevan, and on my show, if you're listening, we actually try to learn from the world's mistakes.
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Well, the Reserve Bank has hiked interest rates again, the third hike of the year, and pushing the cash rate to 4.35%. With inflation running too hot, in part because of the unresolved war in the Middle East, the bank determined it needed to do what it could to bring down demand. But does this rate hike push the economy closer towards a potential recession? Welcome to ABC Business Daily.
I'm Karen T. Clarke.
And I'm ABC Business Editor Michael Yander.
Michael, we're in different surrounds this time. We're in the Reserve Bank. We've been here the past couple of hours.
We've had sandwiches.
We've had sandwiches. We have been deprived of our phones for that period because we had market sensitive information, which was this statement. But not the rates decision. But not the rates decision. That's right. We found out at exactly the same time as everybody else did that at 2.30pm Eastern Standard Time, that the Reserve Bank has hiked interest rates.
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Chapter 2: What is the current cash rate set by the Reserve Bank?
What do you make of the decision? Why is it so much more clear cut? And then let's work through some of these numbers.
I'm not sure it really is more clear cut, but obviously the board members thought so. Clearly, since the last meeting, the conflict in the Middle East has dragged on. I think there was more hope in mid-March that there would be a quick resolution to the conflict, a settlement that reopened the Strait of Hormuz and allowed oil and gas to flow freely out of the Middle East.
That clearly hasn't happened.
Chapter 3: How is inflation influenced by the conflict in the Middle East?
There's still no real sign that it's imminent. We've seen further action overnight disrupting shipping in the Strait, despite US claims of getting ships out. It's all very an unclear situation. Even for Reserve Bank officials, it must be an absolute nightmare to take these kind of decisions.
But obviously it's adding to inflation pressure the longer this international energy supply crunch and price crunch goes on. And they just want to head it off at the pass by getting interest rates up and absolutely stamping out any idea that inflation is going to be allowed to continue to rise unchecked.
Now, we have heard language from the deputy governor previously. He described this as the central banker's nightmare, where you have a situation where you've got a supply shock. And what we have at the moment is an oil supply shock, which means you're getting upwards pressure on inflation, but you're also downgrading GDP growth at the same time.
And so, unfortunately, that means if you're trying to deal with inflation by bringing down demand domestically, which is what they're trying to do by hiking interest rates,
Chapter 4: What are the implications of the recent rate hike for mortgage holders?
you're also making it harder for growth to be positive.
What's happened is we've heard for years, since the Philip Lowe as RBA governor days, about this narrow path that the RBA has been walking, which is to get inflation down and under control and back to the middle of its 2% to 3% target, but without tipping the economy into recession. What the Middle East oil crisis has done is make that path that was already narrow... wafer thin.
It's incredibly narrow. It's a proper high wire act at this point. What the Reserve Bank has clearly done today, in my opinion at least, is to lean very much on the side of that path that is leaning over the precipice of recession to stay away from the fire of inflation.
So they have taken another step today that brings Australia indisputably closer to the risk of a recession with three rate hikes in a row. but their hope is that it stamps out any threat of ongoing inflation and price pressures staying out of control and maybe a more damaging recession later on if we allowed inflation to remain out of control.
Yeah, it's a very difficult path to try to walk, but it is important to note that the Reserve Bank is not doing this because it enjoys inflicting play. These are not sadists. This is a group of people who are trying to figure out how
how to set the interest rates of Australia in order to both keep prices growing at a relatively low and stable rate, but also to not have mass unemployment and see the country careening into recession. It's just very hard to do that right now.
Let's work through some of the numbers because this is, I think, perhaps part of the reason why this result was more clear cut is that the Reserve Bank had at this meeting, which they didn't have at the March meeting, updated forecasts, laying out for them exactly where the Reserve Bank thinks the economy could be going.
And we should point out, one of the features of this statement of monetary policy is they take as given the market expectation of where interest rates are going to go. Now, at the moment, the market believes that there will be 60 basis points of rate hikes this year. So that is basically two and a bit. We've just had one of them. So that's the assumption.
And all these numbers are based on those assumptions. So that might be partly guiding why the members of the board decided to hike because it's keeping in line with market expectations.
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Chapter 5: Why did the Reserve Bank decide to hike interest rates again?
In one scenario, people kind of continue on despite that, which is better for growth but means inflation stays higher for longer. And therefore, interest rates might need to go higher for longer. The second scenario is much worse for growth. That's that one where unemployment goes above 5% and we are on the borderline of falling into recession. That is much better for inflation, though.
That would have inflation below the middle of the Reserve Bank's target band before the end of this forecast period, which is middle of 2028, because the economy would be so weak That you have a complete collapse in demand. You can't pass on the price increases. And this is part of the RBA strategy.
Take demand out of the economy, then consumers are adding competitive pressure on businesses not to pass through these cost increases. You know, businesses are expecting to see their costs go up 10 or 15% over the next year. But so far, they're only expecting to be able to pass on about a third of that cost increase.
But if generalized price increases happen and all their competitors are able to get away with raising prices, then they could pass on a lot more and then inflation stays a lot higher and that is what the RBA doesn't want to happen.
And this is a really difficult thing to forecast, isn't it? That the RBA needs to try, they're trying to figure out, well, yes, how much of the price increase that individual businesses are feeling Do they pass on to their customers? And that's when we start to see second and third kind of waves of impact of inflationary pressure.
Now, their starting point seems to be because the market was already, there was already constraints that in fact, we would see it pass through faster than we would otherwise see it passed through. And that would mean that we're going to see higher inflationary pressure. But this could go either way, right?
And we're in such an unusual situation that it is quite hard to model exactly how this is going to pass through.
Yeah, and I guess the question most people have is what do we think the Reserve Bank's going to do next? They've done three rate rises in a row. It's hard to tell from this document. I think there is a good chance they will now wait and see, having done three sharp rate hikes. They have six weeks till the next meeting in the middle of June.
Even then, though, they might allow more time to see what the picture is developing and which of their scenarios is coming to pass. And that could be part of this, as I said, stitching time to save nine strategy. Let's do three sharp rate hikes up front, clamp down on inflation, watch the economy slow, and then hope that we don't have to go any further.
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