What the September rate hike forecast says about the RBA’s strategy

While a cash rate hike is on the cards, speaking with Accountants Daily, Colhoun said that a higher rise is not expected; however, further hikes after Tuesday’s announcement is a possibility.

“I think it's very unlikely they'll move by [more] than 25 basis points,” Colhoun said.

“They've very clearly signalled that interest rates are going up next Tuesday. What I'll be looking for is the messaging, and what that suggests about, [whether] there is likely to be a quick second-rate rise, do they actually think they need to be half a per cent higher, rather than just a quarter of a per cent higher,” he added.

“I think that's likely because at the margin, 25 basis points isn't that significant for the whole economy, so I suspect we will see interest rates half a per cent higher before Christmas or earlier in the New Year, and that will provide some further restraint on the economy, which should be helpful in trying to lower the rate of inflation, which is what they're trying to do.”

While higher interest rates are not on the wish lists of mortgage holders, business owners, and households, it is crucial to manage inflation, Colhoun said.

“If you just let prices keep rising and rising at a very quick rate, that's not good for lots of people. So you may not like the short-term aspects of it — what it means for a mortgage or your business, but the Reserve Bank would be hoping that it can lower the rate of inflation, which has longer-term benefits,“ Colhoun said.

While several geopolitical and global pressures add to inflation, Colhoun noted government spending has been a government failing under the radar of many taxpayers.

“Most people say the government’s spending too much, and that makes it harder to reduce inflation. That’s a very common criticism of the government at the moment,” Colhoun said.

“There are some external developments: high oil prices and energy prices, and the AI investment boom that is going to make [reducing inflation] even harder to achieve in the short term, so you need to have a bit of a slower economy here to balance those developments which are less welcome.”

The Reserve Bank’s management of its role

Thinking back to the pandemic in 2020, Colhoun said that the Reserve Bank decided not to increase interest rates as high as other countries, with an intention to keep unemployment low, which was the case; however, inflation remained an issue.

“That's obviously a good thing for Australians and Australian society, but they also didn't reduce inflation that much. It's come back to about 3.5 per cent, and that's a bad thing for Australian society,” Colhoun said.

“This is again where you're trying to balance these two competing aims. They cut interest rates in 2025, somewhat, and that proved to be incorrect with hindsight, because inflation wasn't as low as they thought it was, and then they had to reverse that this year, and I think that's right,” he said.

Colhoun told the brand that following this misstep by the RBA, it seems to have been voicing a firmer stance on tackling inflation.

“I think that's most likely, but their communication has been really quite powerful and concerning in the last month. They're much more concerned about inflation than they have been in recent times,” Colhoun said.

“So there definitely seems to have been a switch where, before, they were talking about lowering inflation at the same time as keeping as many of the gains in unemployment as were made during the pandemic period; now it's very much more focused on reducing inflation.”

As the RBA continues to get inflation back to around 2.5 per cent, it seems to be slowing the economy down, Colhoun said.

“At the moment, the RBA is going to set interest rates so that the economy grows more slowly. That will hopefully loosen the labour market up a bit, so the unemployment rate will rise a little bit. That should bring down wage growth, and the slower economy should make people hopefully try and run their businesses more productively and not accept price increases as much as possible,” he said.

“And now it's clear that if you want to lower inflation towards 2.5 per cent, interest rates have to be a bit higher, because the current setting of monetary policy isn't delivering that.”