RBA interest rate rise: Bank economists say 50bp July hike a certainty, with another in August also likely
The Reserve Bank of Australia should raise interest rates by 50 basis points in July and August, economists believe, with another strong set of inflation data likely to suggest the unprecedented rise is needed.
Bank economists on Friday agreed a 50bp increase when the RBA board meets on Tuesday was highly likely — taking the official cash rate to 1.35 per cent — but Westpac chief economist Bill Evans said another 50bp hike next month would be “the appropriate policy”.
Mr Evans said the current boost to spending — as well as the ongoing strong financial buffers accumulated during the pandemic, with millions of mortgage holders years ahead on repayments, and strong household savings — meant the RBA board would have “considerable confidence” that yet another large rate hike wouldn’t damage the economy in the short term.
“From our perspective the issue becomes one of when it will be appropriate to scale back the rate hikes as uncertainty around the impact of higher rates becomes more real,” he said.
“We do not think policy will reach that stage until after the board meeting in August.”
The next quarterly inflation data is due on July 27, less than a week before the RBA board’s August meeting. The cental bank is under growing pressure to prove that it has inflation under control, which is fuelling the forecasts of rapid-fire increases.
The delay in inflation data presented itself as a national embarrassment last weekend when heads of other central banks laughed at RBA governor Philip Lowe when, at a forum in Zurich, he said Australian data was quarterly and not monthly like many other global economies.
“The other thing that’s different — and this is a bad difference — is our CPI is only available quarterly,” he lamented. “Yes, you laugh as well.”
Mr Evans said it would be better for the RBA to pause rate hikes in September to assess the impact of what would then be an unprecedented 175bp of hikes.
Commonwealth Bank head of Australian economics Gareth Aird was less certain of more rapid-fire hikes.
“If the RBA takes rates too high and too quickly ... we would expect bigger falls in home prices,” he said. “Larger falls in dwelling prices would have a negative impact on the real economy.”
Mr Aird said though the RBA was relying on relatively strong household financial positions, households were unlikely to use those savings to fund any discretionary spending amid falling house prices and and sharply rising rates.
While acknowledging that the RBA did not target home prices with its interest rate decisions, Mr Aird said the housing market and the broader economy could not be separated.
“We expect an acceleration in home price falls over coming months due to further RBA rates rises,” he said.
“We believe the speed and size at which home prices correct lower will ultimately act as a limit to how high the RBA will be willing to take the cash rate.”
ANZ head of Australian economics David Plank said he believed a 50bp hike in August was unlikely at this stage but said a “very large increase” in inflation may force its hand to do so. He said 25bp was more likely at this point.
Since the RBA began setting a central cash rate in 1990, rapid-fire increases of the type forecast have only been seen in 1994 — there was a 75bp hike in August, followed by 100bp increases in both October and December, which culminated in a cash rate of 7.5 per cent.
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