I've been in a running debate with fellow ABC economics nerd David Taylor about what the Reserve Bank will do with interest rates on September 29: to hike or hold?
asserted
Bank → run → September
Our office argument is a microcosm of the same debate playing out in banks, trading rooms and probably at the RBA headquarters.
asserted
argument → play → headquarters
The traders have swung decisively to a rate hike, priced in at an 87 per cent probability according to LSEG data.
uncertain
traders → swing → data
The economists are more divided.
asserted
economists → divide → ?
Of the big four banks, so far, only NAB has a September rate rise as its "base case", but the other three expecting the RBA to wait until November all acknowledge the September meeting is very much "live".
asserted
meeting → have → November
While the annual headline Consumer Price Index (the Australian Bureau of Statistics' key inflation measure) fell from 3.8 to 3.5% in July, that was higher than economists were predicting.
asserted
economists → fall → July
The RBA's preferred trimmed mean number, that strips out the most volatile price moves, also remained stuck at 3.6 per cent.
asserted
that → trim → cent
Moreover, the detail showed that services price rises remained stubbornly above the RBA's target, telling economists that there are domestic price pressures rather than just imported inflation from higher fuel costs.
asserted
rises → show → costs
Those inflation numbers, released in August, already had some economists pencilling in a rate rise for September, or at least the risk of one.
asserted
economists → release → one
The Australian economy grew 2.1 per cent over the 12 months to June, once again a bit ahead of economist forecasts.
asserted
economy → grow → forecasts
Historically, 2.1 per cent is a pretty mediocre annual growth rate for Australia, but the RBA now reckons the nation's economic speed limit is about 2 per cent, due to very weak productivity.
asserted
limit → reckon → productivity
One of the factors driving growth over the past year has been a surge in business investment, mostly led by AI and related data centre construction.
asserted
One → drive → AI
This building frenzy is happening at such speed and there's so much cash behind it that crazy money is being hurled at tradespeople and technicians to get these things erected in a hurry, which is then flowing through to broader construction inflation.
asserted
which → happen → inflation
Finally, today's US rate rise, on top of a move from the European Central Bank last week and the virtual certainty of one from the Bank of Japan tomorrow, is heaping pressure on the RBA to follow.
asserted
rise → heap → RBA
The relative fall in the Australian dollar against the currencies of countries that are raising rates will push up import costs and add to inflation, while also making Australia's exports a bit more competitive, adding to growth.
Australia's economy is very different from the US
So, the market's right?
asserted
market → raise → US
you ask.
asserted
you → ask → ?
A September rate rise is a done deal?
asserted
rise → do → ?
First, as all the RBA's senior officials have pointed out repeatedly, our central bank has already raised rates three times this year.
asserted
bank → point → rates
Unlike post-COVID, where Australia lagged the rest of the developed world on rate rises, this time we are leading the way.
asserted
we → lag → way
Secondly, as US President Donald Trump was keen to point out in his Truth Social post this morning, the American economy is genuinely booming.
asserted
economy → point → post
Unemployment is falling (most recently to 4.1 per cent), investment is surging and consumer spending is strong.
While the latter two are also broadly true for Australia, our jobs market is the inverse of the US.
asserted
market → fall → US
Over there, the unemployment rate started the year at 4.3 per cent and has fallen to 4.1 per cent.
asserted
rate → start → cent
Here, the seasonally adjusted jobless rate started the year at 4.1 per cent and has risen to 4.5 per cent.
asserted
rate → adjust → cent
A third key difference is the prevalence of variable-rate mortgages here, which has meant that the three rate rises early this year, along with major tax changes, have sent the housing market into a rapid reverse from last year's boom.
asserted
rises → mean → boom
Chief economists Paul Bloxham from HSBC and David Bassanese from Betashares both expect the RBA to hike rates in September, but both also acknowledge the effect that is likely to have on housing.
asserted
that → expect → housing
"Further rate rises will add to the downward pressure on house prices, which in turn risks more substantial slowing in consumer spending and housing construction," Bassanese warns.
asserted
Bassanese → add → spending
Bloxham now expects a national 13 per cent peak-to-trough fall in house prices, and explains there are four ways this will slow Australia's economy.
asserted
this → expect → economy
There's the wealth effect, with every 5 per cent fall in house prices expected to reduce consumer spending by 0.8 per cent over two years.
asserted
fall → be → years
"Our 13 per cent assumed peak-to-trough decline would mean around 0.4 per cent less GDP in two quarters, and 1 per cent less GDP over time," Bloxham notes.
asserted
Bloxham → assume → time
"During the 9 per cent housing price decline between 2017 and 2019, ownership transfer costs fell 27 per cent, taking 0.4ppts off annual GDP growth," he observes.
asserted
he → fall → growth
Falling stamp duty revenues will eat into state budgets, potentially forcing spending cuts.
asserted
revenues → fall → cuts
Finally, falling prices tend to stop a lot of property development in its tracks, especially when rates and building costs are rising too.
asserted
rates → fall → tracks
That will free up some workers for the data centre boom and keep something of a lid on construction costs, although fewer new dwellings won't help rental inflation.
Is the risk of moving rates too early greater than the risk of waiting?
asserted
risk → free → waiting
There are two other questions the RBA board members need to ask before raising rates in September.
asserted
members → be → September
The first is, how much do they trust that monthly inflation read from July.
asserted
they → trust → July
"The question is just how much is due to post financial year price adjustments and how much is a sustained increase in underlying inflationary pressure," Westpac's economists asked at the time of its release.
asserted
economists → ask → release
"The monthly CPI does not provide enough information to confirm this in either direction.
asserted
CPI → provide → direction
"
Waiting until the November meeting gives the RBA the chance to get the full September quarter data, which it trusts far more than the relatively new monthly figures.
asserted
it → wait → figures
The second is how far the RBA can push rates before something in the economy snaps.
asserted
something → push → economy
There was evidence that a lot of recent home buyers were struggling with their mortgage repayments the last time the cash rate was 4.35 per cent.
asserted
rate → be → repayments
…and 3 more, not listed.
The Aporia
