The Reserve Bank board will announce its interest rate decision today at 2:30 AEDT.
It's part of Deutsche Bank's Australia chief economist Phil O'Donaghoe's job to forecast what could happen.
This isn't pie in the sky stuff, there's economic modelling and number crunching involved.
Last week he produced some research, leaning on what economists call the Taylor Rule, announcing Deutsche Bank saw four more interest rate hikes by the Reserve Bank.
That would lift the cash rate to a "terminal" or final rate of 4.1 per cent, Mr O'Donaghoe concluded.
Do Australian households respond to rate hikes?
A week on, Mr O'Donaghoe says he's never received so much interest in a piece of research.
"After recently revising my forecast for the RBA, I cannot recall such widespread media interest in a piece of research I have written," he says.
Mr O'Donaghoe puts the interest down to frayed nerves about what has become one of the most aggressive tightening cycles in the Reserve Bank's history.
"I think that reinforces just how sensitive Australian households are to RBA policy, because unlike in countries like the US, mortgage interest rates in Australia key directly off the cash rate," he explains.
"This means that the household spending transmission mechanism in Australia is more powerful than it is elsewhere."
According to the Australian Bureau of Statistics (ABS), average household debt was $261,492 in 2021–22, which is among the highest in the world.
Mr O'Donaghoe says he hopes economists' commentary, like his own, has a role in potentially limiting how aggressive the Reserve Bank ultimately is with interest rates – if fear of many more interest rate hikes has the effect of pulling spending back now.
"In some ways, this 'announcement effect' can also be helpful for the RBA, if household sector behaviour actually responds to the 'news'," he says.
Retail spending has dropped – but will it be enough to turn rate rises around?
Since that forecast, the ABS published new data showing consumers had begun tightening their purse strings in December with retail sales falling 3.9 per cent.
If consumer spending doesn't go down, prices won't go down – and interest rates will likely remain higher for longer
Given that, The Drum asked Mr O'Donaghoe if he had considered revising his interest rate forecast again.
"I still think the best course of action for the RBA is to hike aggressively over the next six months or so," he says.
"That would put the RBA in a better position to ensure inflation returns to [the Reserve Bank's target band of between 2 and 3 per cent] in a timely manner.
"That will help ensure that price and wage expectations remain consistent with that inflation target."
The economist says the big risk for the Australian economy is that consumer inflation expectations (where consumers think prices are heading) get entrenched above 2 to 3 per cent.
Put another way, if consumers believe prices will remain elevated and are prepared to pay those higher prices – even at great personal cost – prices more broadly simply won't come down and will remain stuck.
This would see interest rates remain higher for longer.
Borrowers will likely pay the highest price
Rather, economists want consumers to refuse to pay higher prices now, by holding their spending back until businesses lower their prices to lure them back.
Economists see even higher monthly mortgage repayments as the best way to achieve this.
"One possible piece of good news from further aggressive rate hikes this year will be that the RBA will probably be in a position to start lowering rates in 2024," Mr O'Donaghoe says.
"If the RBA instead chooses instead to curtail rate hikes prematurely, rates will likely need to stay higher for longer."
AMP's chief economist Shane Oliver also had a stab at applying the Taylor Rule and came up with a rather different conclusion.
"The Taylor Rule suggests the cash rate should be up around 12 per cent – a level not seen since the early 1990s," Dr Oliver concluded.
Chief economist at AMP, Shane Oliver, says it's possible for the Reserve Bank to press pause on rate hikes, and doesn't believe it will peak above 3.6 per cent.
However, his professional view is the Reserve Bank's cash rate will likely peak at 3.6 per cent – 0.5 percentage points above where it is now at 3.1 per cent – but that it could pause now.
"With RBA rate hikes already getting traction – indicated by recessionary levels for consumer confidence, the collapse in housing indicators, signs that retail sales and the jobs market are starting to slow – and signs that global and local inflationary pressures are peaking, our view remains that we are near the top in rates," Dr Oliver explains.
"Taking the cash rate to 4.1 per cent or more would be a policy mistake risking a major recession."
"It's interesting to see that the money market now sees the cash rate peaking at around 3.6 per cent, after expecting 4 per cent or more over the past six months, and now sees the possibility of falling rates by year end.
"It's clearly sniffing out a likely turn in the inflation cycle in Australia," Dr Oliver says.
But perhaps the most hawkish economist (who expects the most interest rate increases) is Angela Jackson, lead economist with Impact Economics and Policy.
"Everyone always wants a firm prediction, but the RBA will respond to the data that comes in and do it's best to calibrate the so-called soft landing," Dr Jackson says.
"[I] expect at least two and possibly up to five more [interest rate increases] this year."
"A rise today will hurt households that got some respite over summer after the barrage of increases through 2022.
"Expect the RBA to be more cautious this year as people come off their fixed mortgages, but it will remain focused on taking inflation [down] — which means higher interest rates."
