The smart money is on another 50-basis-point (bp) rate hike from the Reserve Bank of Australia (RBA) next week after the Federal Reserve announced its third consecutive increase of 75 bps.

As at 26 September, the ASX 30 Day Interbank Cash Rate Futures October 2022 contract was trading at 97.290, indicating an 83 per cent expectation of a 50-bp interest rate increase at the next RBA Board meeting. On 14 September the expectation was only 67 per cent.

While many have speculated that the RBA rate hikes will slow down, IFM Investors' chief economist, Alex Joiner, said the RBA has not alluded to any slowing of the current pace of rate hikes. 

“Instead, the central bank has stated it will be ‘guided by the incoming data’ with regard to future moves,” Mr Joiner said. 

“We’d assert that the bank is moving at a pace that means it will only know it has moved policy into contractionary territory in hindsight, which poses a risk to the economy.

“At least in its rhetoric and actions, it is seemingly discounting this future risk to address current inflationary conditions. With no signal in the data to date that suggests the RBA should stop raising rates, further tightening is expected over the coming months,” he said.

However, Mr Joiner noted that the RBA is not yet as hawkish as its counterparts in the UK and the US, which are resolved to act more aggressively to tame higher inflation.

The RBA notes that “price stability is a prerequisite for a strong economy” and how higher rates pose a downside risk to economic growth, rather than the more direct language of the Fed who admit that households are being caused “pain” by its policy action.

“Hopefully, a less painful moderation of demand will be enough to reduce inflationary pressures, but central banks are treading a fine line that they risk crossing,” Mr Joiner said.

“This is due to uncertainty around the level at which their policy settings will gain traction, combined with an urgency to act.”

The chief economist observed that central banks are of the collective mind that a failure to restore price stability would mean far greater pain than the increasing pressure of policy action on households.

“Although, one could argue that the only thing worse for households than paying materially higher prices is not being able to pay them due to job loss,” Mr Joiner warned.

RBA ‘flying blind’

Earlier this month, NAB chief economist, Alan Oster, said that, given it takes around 12 months for monetary policy to hit the economy, the central bank’s aggressive rate rises were “flying blind”. He expects rate hikes to pause in early 2023.

“But by then, loan repayments will be up around $450 per month at least and the fixed loans will be rolling off,” Mr Oster said.

“Our home loan book suggests the big impact is late 2022 to early-mid 2023,” he said, adding that borrowers feel rate hikes sooner at around three months.