RBA set to hike rates this week

04 Jul 2022

The Reserve Bank of Australia (RBA) is forecast to hike interest rates this week in a bid to curb soaring inflation.

Economists polled by Bloomberg predict the central bank will increase the cash target rate by half a percentage point to 1.35% on Tuesday, a level not seen in more than three years.

The central bank is trailing others around the world, holding rates near all-time lows, before raising rates in May and June that brought the benchmark rate up by 75 basis points to 0.85%.

Despite Australia facing the same inflationary pressures as other economies, fuelled by rising food, gasoline and electricity costs, its consumers are the amongst the most indebted in the world, with the household debt-to-income ratio at a record high of 187%, Bloomberg reports.

Central banks in the UK, U.S., Canada and New Zealand have moved faster than Australia to curtail rising inflation, as investors worry aggressive increases may result in recession.

The RBA “has to tread carefully not to crush the consumer if it wants to avoid a serious growth downturn,” according to Diana Mousina, AMP Capital Markets senior economist.

Mousina forecasts the cash rate will reach a peak of 2.6%, compared to forecasts of 3.2% in December and a top of 3.7% in 2023.

Australia’s A$2.1 trillion economy is faring well following the initial two rate hikes. Yet, the majority of economists polled have revised down their growth predictions, the Bloomberg report adds.

RBA governor Philip Lowe said rates will likely increase by up to 50 basis points at this week’s meeting, as opposed to indications the board could make a 75-basis point increase.

According to Morgan Stanley economist Chris Read, there may be a 50-basis-point rise in July and August, after which there will be quarter-point hikes until November, to bring the cash rate to 2.6%. “Broader slowing of jobs and inflation won’t be felt until late this year, keeping 2H22 rate hikes on track, even as risks grow for 2023,” he said.