Walk now or ride more: RBA warns it’s ‘playing with fire’

One of Australia’s biggest banks has warned the Reserve Bank is “playing with fire” if it fails to raise rates on Tuesday – triggering steeper 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 “balanced risks” where the consequences of not hiking far outweigh the risks of a modest rate hike now.

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The market has shifted to a 72 percent chance of a rate hike.

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“Failure to raise rates in February risks inflation returning to the bottle, raising the risk of a rate hike later this year,” the bank’s letter said.

“On the downside, a timely 25bp hike is unlikely to derail the broader economic recovery, but could instead curb the risks of early inflation.”

This comes as the market moved to 72 percent on Friday that the RBA will raise rates to 3.85 percent at its February monetary policy meeting.

The CBA analysis defended the previous patient approach of the RBA as reasonable when dealing with asset side shocks, but the warned conditions have changed.

“Previously they were facing a series of supply-side shocks,” the CBA paper said. “Today we are facing a very different situation. Pressure has started to appear on the demand side of the economy and there is still no ‘stagnation’ or room to work on the demand side.”

It warned “in many ways, this is a very dangerous recipe and requires a very different strategy – decision-making is now ready, not patient”.

What the RBA has done on interest rates over the past year – start date, % change and % rate target.

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The bank argues that if the RBA holds rates steady in the hope that inflation slows on its own, this would be “playing with fire”.

The CBA paper said that if inflation and growth pressures continue to build, the RBA will find itself “far behind the curve” and be forced to hike harder to control inflation “with significant damage to the labor market.”

However, if the RBA raises rates by 0.25 per cent on Tuesday and inflationary pressures prove to be minimal, “the cost is likely to be modest”.

“In other words, a timely 25bp hike now would not disrupt the economy, but could prevent a sharp rise in inflation and a higher hiking cycle,” the analysis said.

This comes as RBA deputy governor Andrew Hauser recently revealed that “inflation is above 3 per cent – ​​let’s be clear, it is very high”.

The warning comes as the revised RBA Monetary Policy Board continues to find its feet. – with CBA economist Luke Yeaman finding it now places more weight on balancing its dual mandate of full employment and inflation.

He said this “must not be mistaken for reluctance or willingness to accept higher-than-target inflation”.

“The bar may be a little high, but if there is a clear case to be made based on the data, we expect the Board to respond.”

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

“With subdued inflation remaining above target for two quarters, a strengthening economy and declining unemployment, the case for action is compelling and the risk of uncertainty high.”