Betashares Chief Economist David Bassanese has weighed in on the upcoming RBA Cash Rate decision on 3 February.
Experts have been updating their predictions after the Australian Bureau of Statistics (ABS) released the latest inflation data yesterday.
Across the board, it seems like there is little hope for an RBA rate cut next week, after CPI rose by 3.8% in the 12 months to December, sending the ASX 200 south yesterday.
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What do these numbers tell us?
The official cash rate currently stands at 3.60%.
As a quick refresher, the cash rate is the interest rate that banks pay to borrow funds from other banks in the money market overnight.
It influences all other interest rates, including mortgage and deposit rates.
It acts as a benchmark for financial institutions (like banks).
When the RBA increases the cash rate target, banks tend to follow.
This means variable loans like mortgages will increase, cutting into the disposable income of many Aussies.
Yesterday, the ABS reported that the Consumer Price Index (CPI) increased by 3.8% in the 12 months to December.
CPI shows how fast prices are rising, and The Reserve Bank uses it as a guide for setting the cash rate:
- If CPI is high, it is likely to raise or keep rates high to slow spending and cool prices.
- If CPI is low, it often lowers rates to encourage spending and support the economy.
Essentially, CPI is one metric that helps decide whether interest rates should go up, down, or stay the same.
RBA to hike in February
In a new report, Betashares Chief Economist David Bassanese said the quarterly consumer price index report (CPI) suggested the hot underlying inflationary pressures evident in the September quarter persisted into the December quarter.
According to Mr Bassanese, this suggests the lift in economic growth over the past year has already run into inflationary roadblocks.
As a result, the Reserve Bank seemingly has little choice but to throttle back current economic momentum through at least one, or possibly two, rate hikes in the first half of this year.
The report pointed towards key economic factors such as:
- Seasonally adjusted quarterly gain in trimmed mean inflation which only eased to 0.9% in the December quarter.
- New home purchase costs rose 1.3% over the quarter, up from 1.0% in the September quarter.
- Rental inflation also remained firm, with a quarterly gain of 0.8% after a 1.0% gain in the previous quarter.
- Holiday and travel costs rose a blistering 4.9%, after a 3.0% gain in the previous quarter.
All up, it appears to be game, set and match for a rate rise at the February policy meeting. My base case is that the RBA will raise rates by 0.25%, taking the cash rate to 3.85%.
To my mind, two rate hikes – given our highly indebted and interest-rate-sensitive economy – should be more than enough to dampen economic growth again and rein in ongoing inflation pressures in areas such as housing, travel and hospitality.
Where should investors turn?
While RBA rates and inflation are far from record highs, there are sectors that have historically performed well in these environments.
A report last month from Canaccord Genuity pointed to two sectors in particular:
- Resources – A more hawkish RBA combined with a dovish Fed supports AUD strength, historically a key driver of mining sector outperformance. Ultimately, resources are more sensitive to global growth than domestic demand.
- Consumer staples – Typically outperform into RBA hiking periods, and valuations look attractive relative to Cyclical Retail, creating scope for a rotation.
