Interest rates: Melbourne Cup rate rise a bad idea

Interest rates are set to rise on Melbourne Cup Day according to most experts, with predictions rates will stay “higher for longer”.

But Deloitte Access Economics partner Stephen Smith has warned that would be a mistake.

“Deviating from the herd is a lonely business,” he said,

“Most market economists and commentators spend their time focused on trying to predict what the Reserve Bank Board will do on the first Tuesday of the following month.

“That’s part of what we do too, but we also spend time thinking not just about what the board will do, but what they should do.

“Given the market reaction to Wednesday’s Consumer Price Index print coming in slightly higher than expected, the Reserve Bank Board may feel compelled to lift the cash rate in November.

“That would be a mistake.”

The Deloitte economist said that contrary to the rapid-fire conclusions of many, the September quarter inflation print did not lay out a clear need for further rate hikes.

“Perhaps the most important question for the bank and policy makers is considering what a November hike might actually achieve,’’ he said.

“With demand already crushed and wage growth contained, are further rate hikes the necessary policy lever to address inflation? Interest rates are not going to be able to address the key sources of inflation, namely rent, electricity and petrol.

“As a result, the efficacy of a further interest rate hike to tame inflation is muddy at best.

“Overall, the outcome of the RBA Board meeting on Melbourne Cup Day is not a done deal. Will the RBA raise rates in November? Probably. But should they? No.”

The ANZ bank is forecasting a rate rise suggesting interest rates are not likely to come down after the expected rate rise until September 2024 or later.

“We don’t expect any easing until Q4 2024. The risks for the outlook are towards sticky inflation rather than a concerning drop in activity,’’ the ANZ said.

Lifting rates by 25 basis points would take the cash rate to 4.35 per cent on Tuesday after the RBA kept rates on hold at the last four meetings.

Each 25 basis point increase in variable rates lifts monthly mortgage payments by about $15 for each $100,000 borrowed.

For a $600,000 mortgage another rate rise would increase rates by $90 a month.

Since the RBA began raising rates last May, the increases have increased payments by a whopping $1134 for those on a typical $500,000.

That’s $13,000 a year in extra payments.

The ANZ bank’s senior economist Blair Chapman warned on Friday that annual personal credit growth also recorded its strongest result in over a decade.

This was likely due to the cost-of-living pressure on households that do not have access to housing equity.

“We expect the RBA to increase rates on Tuesday and to note in the Statement on Monetary Policy that it may need to tighten again,’’ he said.

“We expect a hawkish tone throughout the statement. We expect the Outlook chapter to emphasise upside risks to the outlook and the possibility of elevated inflation persisting.

“The RBA is also likely to highlight downside risks, such as the possibility of slower growth in China.”