Walk now or walk more: RBA warned it is ‘playing with fire’ – realestate.com.au

One of Australia’s largest banks has warned the Reserve Bank is “playing with fire” if it fails to raise rates on Tuesday – which will lead to sharper rate hikes and job losses this year.

The Commonwealth Bank’s stark warning comes ahead of the RBA’s monetary policy decision on Tuesday, with a research note warning of “asymmetric risks” with the consequences of no rate hike now far outweighing the risks of a modest rate hike.

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The market has reached a 72 percent chance of a rate hike.

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“If rates are not raised in February, there is a risk that the inflation genie will come back out of the bottle, increasing the risk of steeper rate hikes later in the year,” the note said.

“On the other hand, a timely 25 basis point increase is highly unlikely to derail the broader economic recovery but could instead contain inflation risks early.”

This comes as the market on Friday hovered at a 72 percent chance that the RBA would raise rates to 3.85 percent at the February monetary policy meeting.

The CBA analysis defended the RBA’s previous patient approach as sensible in combating supply-side shocks, but warned that conditions have fundamentally changed.

“Previously, they faced a series of supply-side shocks,” the CBA paper said. “Today we face a very different situation. Pressure is starting to come from the demand side of the economy and there is still not much, if any, ‘slack’ or room to maneuver on the supply side.”

It warned “in many ways this is a more dangerous recipe and requires a very different strategy – decisiveness is now called for, not patience”.

What the RBA board has done to interest rates over the past year: effective date, rate of change and cash interest rate target %.

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The bank argues that if the RBA keeps rates stable in the hope that inflation will naturally decline, this would be “playing with fire”.

The CBA paper said that if pressures on inflation and growth continued to increase, the RBA would soon find itself “well behind the curve” and forced to rise faster to curb inflation “with more serious damage to the labor market.”

However, if the RBA raises rates by 0.25 percentage points on Tuesday and inflationary pressures prove less acute, “the costs are likely to be marginal”.

“In other words, a timely 25 basis point hike won’t crash the economy now, but it could prevent a sharp rise in inflation and a steeper rate hike cycle,” the analysis said.

This comes as the RBA’s deputy governor, Andrew Hauser, recently stated: “Inflation above 3 percent – ​​let’s be clear, it is too high.”

The warning comes as the revamped RBA Monetary Policy Board continues to find its feet. – with CBA economist Luke Yeaman noting that it is now placing slightly more weight on balancing its dual mandate of full employment and inflation.

He said this “should not be confused with hesitation or a willingness to accept above-target inflation”.

“The bar may be slightly higher, but if there are clear arguments for action based on the data, we expect the board to respond.”

CBA expects the RBA board to raise rates by 0.25 percentage points at Tuesday’s meeting to bring the cash rate target to 3.85 percent.

“Now that average inflation has been well above target for two quarters, the economy is improving and trend unemployment is falling, there are compelling arguments for action and the risk of hesitation is high.”