MNI INTERVIEW: RBA At Risk Of Q1 Hike - McKibbin

Australia’s nominal neutral rate of interest is likely 4% or above, significantly higher than Reserve Bank of Australia models suggest, increasing the likelihood of at least one hike to the cash rate from its current 3.6% before April, former board member Warwick McKibbin told MNI. 

McKibbin, who served on the board from 2001 to 2011, estimated a 25% chance the RBA will lift rates in Q1, noting that the bank’s 2.5-3.5% neutral rate estimate is too low. “But will they? It’s hard to see how they do that from here, because everyone’s been moving in one direction," McKibbin said in an interview. "Stopping that will lead to a lot of media and political adjustments. I’m not sure they will, but I think they should.” 

Markets currently price no further hikes, with a 3.49% rate factored in by the end of Q1.

“My reasonable estimate for the nominal neutral rate is around 4%,” he said, adding the RBA likely moved rates down too quickly under political and market pressure.

With zero productivity growth, high real wage growth is likely to be inflationary, McKibbin noted. If employment growth starts rising sharply again, the RBA will need to consider its policy settings, he added, pointing to the 20bp tightening in October's unemployment print to 4.3%.   

For the moment, flat 0.8% q/q wage growth over Q3 was a sign that wage setters were potentially factoring in the RBA's resolve to contain inflation, alongside dismal productivity growth, he continued.  

"The big thing to focus on is nominal GDP growth, or nominal net terms of trade. It's still growing well above what you think would be consistent with 3% inflation and zero productivity growth, but population and labour force growth of around 2%." 

In August, McKibbin warned the RBA against further easing, noting nominal GDP growth and other data points would likely justify rate hikes. (See MNI INTERVIEW: Further RBA Cuts Risk Policy Mistake - McKibbin)

GLOBAL INSTABILITY

However, global instability will still provide significant uncertainty to the Australian economy in 2026, McKibbin warned, pointing to potential financial shocks in the U.S., where equity valuations – especially among tech giants – appear unsustainable, and much AI-related expansion is being debt-financed rather than funded by earnings. 

“The risk now is a financial adjustment in response to excessive exuberance,” he said, noting that while investment in data centres and infrastructure supports growth, productivity gains remain uncertain.

Trade wars, China’s slowing economy, and reallocation of capital across markets remained areas of potential shocks, he continued. While these shifts may pressure smaller currencies like the Australian dollar, they could also reduce borrowing costs for governments if capital is invested domestically. 

The RBA had viewed the trade war as potentially deflationary earlier in the year, but McKibbin believes the assessment may not be so clear cut.