CBA has warned of stark consequences if RBA does not act on rates Tuesday.
One of Australia’s biggest banks has warned the Reserve Bank is “playing with fire” if it fails to hike rates on Tuesday – triggering steeper rises and job losses this year.
The Commonwealth Bank’s stark alert comes ahead of the RBA’s monetary policy decision on Tuesday, with a research note warning of “asymmetric risks” where the consequences of not hiking far outweigh the risks of a modest rate increase now.
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The market has swung to 72 per cent chance of a rate hike.
“Failure to hike rates in February risks letting the inflation genie back out of the bottle, raising the risk of steeper rate hikes later in the year,” the bank note said.
“On the flip side, a timely 25bp hike is highly unlikely to derail the broader economic recovery, but instead could stem inflation risks early.”
This as the market swung to 72 per cent odds on Friday that the RBA would lift rates to 3.85 per cent at its February monetary policy meeting.
The CBA analysis defended the RBA’s previous patient approach as sensible when battling supply-side shocks, but warned circumstances have fundamentally shifted.
“Previously they faced a series of supply-side shocks,” the CBA paper said. “Today we face a very different situation. Pressure has started to come from the demand side of the economy and there still isn’t much, if any, ‘slack’ or room to manoeuvre on the supply side.”
It warned “in many ways, this is a more dangerous recipe and needs a very different strategy – decisiveness is now in order, not patience”.
What the RBA board did with interest rates in the past year – effective date, change % and cash rate target %.
The bank argues if RBA holds rates steady hoping that inflation eases on its own, this would be “playing with fire”.
The CBA paper said if inflation and growth pressures continue building, the RBA would then quickly find itself “a long way behind the curve” and be forced to hike harder to tame inflation “with more severe damage to the jobs market.”
However, if the RBA raises rates by 0.25 percentage points on Tuesday and inflation pressures prove less acute, “the cost is likely to be marginal”.
“In other words, a timely 25bp hike now won’t crash the economy, but it could prevent a sharp rise in inflation and a steeper rate hiking cycle,” the analysis said.
This comes as RBA deputy governor Andrew Hauser recently stated “inflation above 3 per cent – let’s be clear, it’s too high”.
The warning comes as the revamped RBA Monetary Policy Board continues to find its feet. – with CBA economist Luke Yeaman finding it now places slightly more weight on balancing its dual mandate of full employment and inflation.
He said this “should not be mistaken for hesitancy or a willingness to accept above target inflation”.
“The bar may be a little higher, but if there is a clear case to act based on the data, we expect the Board will respond.”
CBA expects the RBA Board to hike rates by 0.25 percentage points at Tuesday’s meeting to bring the cash rate target to 3.85 per cent.
“With trimmed mean inflation sitting well above the target band for two quarters, a strengthening economy and falling trend unemployment, the case for action is compelling and the risk of hesitating is large.”
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