Australia’s official interest rates are all but certain to be lifted on Tuesday with the expected half-percentage point increase marking the Reserve Bank’s sharpest tightening phase since 1994.
A survey by Bloomberg News found 28 of 30 respondents predict the RBA board will lift the cash rate from 1.35% to 1.85% at its monthly meeting. That move would mark a 175-basis point increase in the rate since it began hiking in May.
Chief economist at Commonwealth bank, Gareth Aird, said the case for a larger increase was weak.
“The [June quarter] inflation data did not surprise to the upside,” Aird said.
“And whilst the annual rate increased, the quarterly pulse of inflation did not accelerate.”
For an owner-occupier with a $500,000 variable rate mortgage and 25 years to go, a 50 basis-point increase in the lending rate would add about $140 in monthly repayments, according to RateCity.com.
The 1.75 percentage point increase since May – if that’s what the result is after Tuesday’s decision – would lift monthly repayments by $472.
Australia’s consumer prices rose 6.1% in the June quarter from a year ago, the highest in more than two decades. The 1.8% increase from the previous three months, though, was less than 2.1% recorded during the March quarter.
Central banks in many nations are lifting interest rates to prevent expectations of inflation setting in. Last week the US Federal Reserve hiked its lending rate by 75 basis points for the second month in a row, marking the quickest rise since the early 1990s.
Aird said attention after the RBA’s meeting will zero in on what governor Philip Lowe has to say about the pace of future rate rises beyond August.
The RBA was expected “to retain a strict hiking bias and for the governor’s statement to contain the line, ‘the board expects to take further steps in the process of normalising monetary conditions in Australia over the period ahead’ or words to that effect,” he said.
The shadow RBA board, set up at the ANU to model the central bank’s approach, also advocates a rate rise on Tuesday to ensure inflation remains moderate.
“Many other indicators suggest inflation will remain high for some time: a tight labour market, a high capacity utilisation rate, supply chain constraints, high energy and food prices, the ongoing Covid-19 pandemic as well as natural disasters,” it said.
Investors have been betting on the RBA to continue lifting its cash rate into 2023, with a peak of more than 3%. Those forecasts, though, have been pared back in recent weeks in part because August’s CPI numbers were lower than some had feared.
There's been a pretty big change in the market's expectations of future interest rates over the past 6 weeks. pic.twitter.com/lgzbT8IHZ6
— Greg Jericho (@GrogsGamut) August 1, 2022
Helping to stoke hopes that some of the worst of the inflationary pressures may be easing include the continued recent falls in the price of petrol.
According to the Australian Institute of Petroleum, the average retail price last week eased to 181.7 cents a litre, down from 192.9 cents a week earlier. (Wholesale prices dropped from an average 165.1 cents to 159 cents over the period.)
So here's what happened to electricity contract prices today following the ACCC's report on gas market - and the increased prospect of Gov doing something about it (i.e. ADGSM)
— Dylan McConnell (@dylanjmcconnell) August 1, 2022
Q3 2022 pic.twitter.com/8V8iUwzEWk
Similarly, some of the worst of the spike in wholesale power prices in the national electricity market – which serves about 80% of the Australian market – seems to be in retreat.
The wholesale electricity prices, though, remain much higher than the $87 a megawatt-hour reported in the first quarter of 2022.
