Economists say whether or not the Reserve Bank of Australia raises interest rates one more time after their monthly board meeting next week or not, Aussies will feel the pain for months to come.
Australia’s central bank has hiked interest rates every month since May last year, with the exception of April and July, when rates were momentarily paused.
The cash rate currently sits at 4.1 per cent, the highest it has been since 2011, after enduring the fastest tightening cycle on record – climbing 400 basis points from the historic pandemic low of 0.1 per cent.
Now, with another board meeting around the corner, Australians – especially borrowers – are waiting with bated breath to see whether the interest rate rises once again or pauses for a second month in a row.
Economists are split on what the RBA will do, especially now that see the effects of the sky-rocketing rates ripple out into the economy.
AMP chief economist Shane Oliver told news.com.au that trying to predict what the RBA was going to do “becomes a bit of a guess meeting to meeting”, especially as they approach the end of a tightening cycle.
But his instinct was that the RBA should hold back on another rate rise.
“There are a bunch of arguments to suggest they will hold and we think they should hold,” Mr Oliver said.
“Inflation is falling faster than expected and there’s a lot of pain out there in households – especially for mortgages and new borrowers – and there would be an increased risk of recession because the more you raise rates the more you could tip [the economy] over the edge.”
The RBA is raising interest rates in its mission to return inflation to its target range – between 2 per cent and 3 per cent.
The latest Consumer Price Index for the June quarter reported inflation at 6 per cent – a drop from 7 per cent in the March quarter and 7.8 per cent in December.
Independent economist Saul Eslake told news.com.au the “better than expected CPI figure” would give the central bank “another opportunity to pause again”.
“It will be the first time in successive months for more than a year they haven’t done something,” Mr Eslake said, adding that the decisions the RBA’s US and European counterparts to raise rates again “erodes my confidence”.
“You can’t rule out another increase at some point, though. But I’d be very surprised if rates got to 5 per cent – though they are in the US and 5.5 [per cent] in New Zealand.”
Economists from the big four banks are also split on whether the RBA will raise rates or not – Commonwealth Bank and Westpac say yes, ANZ says no.
“It’s a very close call, a line ball call month by month, but we think it will most likely be another rate rise, probably the last hike in this cycle,” Commonwealth Bank chief economist Stephen Halmarick told news.com.au.
He said the lower than expected CPI report, a strong labour market, and retail sales turnover falling 0.8 per cent in June, as well as the decisions by international central banks affected the prediction.
Westpac senior economist Matthew Hassan also predicted inflation would rise to 4.35 per cent on Tuesday and would “hold beyond August” before starting to lower in May.
He described it as another “big ask” for Aussies, particularly mortgage-holders, but was important in getting inflation to target.
“We’re not quite there yet,” Mr Hassan said.
“Current tightening is having a significant impact on the mortgage belt. We’re starting to get good news on inflation, but policy’s going to need to stay restrictive … until May next year at least … and there’s still some real risks around that outlook.
“We’ve got one more insurance rate hike from the RBA and we really need to have more confidence that inflation is going to track all the way down.”
But ANZ Bank’s head of Australian economics Adam Boyton expects the RBA to hold the rate steady in August, given how the board acknowledged at its last meeting the rate was “clearly restrictive” on Australians – proven in retail reports and the CPI falling.
“The economy is evolving pretty much as the bank was expecting back in May [2022], except inflation is a bit lower, which is a good outcome and suggests they don’t need to hike rates, they should just sit back and assess and see,” Mr Boyton said.
He did warn, however, that most Australians will feel a tightening of their household budgets for many months to come, whether the RBA raises rates or not.
“The 400 basis points of monetary tightening that’s working through the economy, it takes about a year for the full effect of a rate hike to hit the economy,” Mr Boyton added.
“We will still feel the impact of what they’ve done so far to date for some time.”
And that tightening will be felt especially by borrowers whose fixed rate loans expire this year and will transition to a higher variable rate in the coming months.
“There seems to be this expectation that at if the RBA does nothing the economy is going to roar away as if it’s overdashed on sugar. And the reality is it’s not,” he continued.
“The rate has moved a lot, but we’re still yet to feel the impact of that ‘clearly restrictive’ 4.1 per cent.
“So the bigger dynamic isn’t the economy roaring away on an interest rate unchanged sugar hit but we are going to feel the impact of the rate rises.”