EDITORIAL: Rate cuts turn to rate hikes in the blink of an eye

How quickly things change.

It doesn’t seem so long ago that Reserve Bank of Australia watchers were scrutinising its every squeak hoping for signs that interest rates were coming down or were likely to come down.

Let’s not forget the RBA delivered three interest rate cuts this year.

And as homebuyers gleefully counted how much they were going to save off the mortgage repayments, the steady roll out of economic data and accompanying RBA pronouncements continued.

But what they have amounted to now is the brutal realisation that we can forget about another rate cut.

In what seems like the blink of an eye, it’s all changed. Not only is another rate cut in the near future off the cards, suddenly we are looking at a rate rise.

A pre-Christmas spending splurge and the widening Federal deficit have sparked fears interest rates may have to be hiked several times next year.

Household spending increased by 1.3 per cent in October, which was the biggest monthly increase since January 2024 and more than double the 0.6 per cent rise economists had expected.

The annual increase of 5.6 per cent was the highest in two years and well above the 3.8 per cent inflation rate.

EY chief economist Cherelle Murphy said the RBA’s three rate cuts in February, May and August had encouraged Australians to buy more non-essential discretionary goods.

Over the year across Australia, the broad miscellaneous goods and services category soared by 9.4 per cent, covering everything from haircuts to childcare, jewellery and financial services.

Health costs soared by an annual pace of 7.5 per cent, ahead of recreation and culture on 7.3 per cent, food on 7 per cent and hotels, cafes and restaurants on 6.4 per cent.

The latest figures came just a day after RBA Governor Michele Bullock blew the whistle on the Federal Government’s narrative by making it clear that bigger Budget deficits flowed through to higher interest rates.

Federal Treasurer Jim Chalmers has rejected assertions government spending is making inflation worse and keeping rates higher than they would otherwise be.

But the harsh reality was laid out by Judo Bank chief economic adviser and former Treasury economist Warren Hogan, who predicted the RBA would raise rates in February, March and May to bring inflation within its 2-to-3 per cent target zone.

Seventy-five basis points of rate increases would return the cash rate to 4.35 per cent and cost the average home owner about $4000 a year.

Adding to the grim outlook, the Parliamentary Budget Office on Thursday noted the Federal Government and the States and Territories were further in deficit “despite improved forecast revenue in each jurisdiction”.

This would make it harder for the Commonwealth to return to a Budget surplus in the next four years.

And the ramifications of that may be becoming all too clear.

We now know where that Budget deficit road leads.

Into a rates cut cul-de-sac.

Responsibility for the editorial comment is taken by Editor-in-Chief Christopher Dore.