The Reserve Bank will likely deliver a double dose of bad news next week with a seventh consecutive increase in its key interest rate and an elevated forecast for how high inflation will go before peaking.
Odds are firming among investors that, half an hour before Tuesday’s running of the Melbourne Cup, the RBA will hike its cash rate by 50 basis points. The surprisingly large increase in September quarter consumer prices to a 32-year high of 7.3% was one factor, economists said.
Such an increase would add about $30 more in monthly mortgage repayments for each $100,000 borrowed, assuming lenders passed on such an increase, RateCity said.
The central bank has already lifted interest rates by 2.5 percentage points to 2.6% since May in a bid to dissipate inflationary pressures. The only comparable period of monetary tightening was a 275 basis point increase in the second half of 1994, with next week’s move matching or exceeding that spurt.
Westpac, the only one of Australia’s big four banks to tip a 50-basis point rise at Tuesday’s RBA board meeting, said the recent inflation spike, energy cost increases yet to come, and the limited dimming of demand so far made the case for another big rate hike.
“Labour markets are uncharacteristically tight while the household sector has accumulated significant savings which can buffer higher rates,” Westpac said. “Evidence from business surveys that business conditions and capacity utilisation are remarkably strong also point to unusual resilience.”
The RBA’s 25-basis point rate rise in October was its first slowdown after four straight half-percentage point hikes. It also made Australia the first rich nation to trim the pace of rises even though inflation trends are on a similar trajectory to other big economies.
@ANZ_Research shows that Australia's inflation rate is fast catching up with some other major economies. pic.twitter.com/J63UjQNl2h
— Peter Hannam (@p_hannam) October 28, 2022
The other dose of bad news from the central bank may land next Friday when the RBA updates its quarterly statement on monetary policy. In August, the bank predicted the inflation rate would peak in the December quarter at 7.75%, a figure the federal budget used for its modelling.
ANZ predicts the CPI forecast for the final quarter of 2022 to be revised to 8.1% and the CBA expects 8%. That outcome would be the highest since March 1990 when it was 8.7%. At the time, the RBA’s cash rate was at 16.5%-17%.
The central bank will also likely lift its estimate for the underlying inflation rate – known as the trimmed mean – that strips out more volatile price movement. Back in August, the RBA was predicting it would peak at a record 6% in the December quarter, a level already exceeded by September’s 6.1% result reported on Wednesday.
The ANZ predicts the trimmed mean will reach 6.6% by the final quarter of 2022, while the CBA predicts a peak of 6.5% in that period.
The September inflation numbers shifted “the narrative about Australia being on a different inflation pathway from other developed countries”, the ANZ said.
ANZ expects the RBA will lift its cash rate by 25 basis points on Tuesday on the way to a “terminal rate” of 3.85% over the next year. Westpac has a similar peak forecast.
The CBA also predicts a quarter point move but adds that there is a “non-trivial risk” the RBA may opt for double that. The bank, Australia’s largest mortgage issuer, expects the central bank’s cash rate will peak at 3.1% before it starts cutting before the end of 2023 as the economy and inflation both cool rapidly.
A 50-basis point rise on Tuesday would translate into a cumulative $874 more a month in mortgage repayments for those on a typical $500,000 loan since the RBA hikes began in May, RateCity said. If the RBA increases reach 3.85%, those on such loans would be paying just over $1,050 more each month on their mortgages.
Research by NAB, however, indicates that despite the expectation of further interest rate rises and the much-publicised prospect of falling home prices, the number of Australians who think now is a good time to buy a home is actually rising.
The bank’s property insight report for the September quarter found “a sharp uptick” to 23% from 18% in the previous three months in optimism about buying.
Home buying intentions improved in all states except the ACT, it said. Sentiment to buy an investment property “was basically unchanged”.
