The official interest rate is expected to rise to 1.85 per cent in August, with a third consecutive 0.5 per cent increase tipped by AMP’s chief economist.
This would see the Reserve Bank of Australia (RBA) continue to pursue the fastest back-to-back increase in rates since increases of 0.75 per cent and 1 per cent in November and December 1994, respectively.
On Tuesday, in announcing the first rate call for this financial year, the RBA said it “expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead”.
“The size and timing of future interest rate increases will be guided by the incoming data and the board’s assessment of the outlook for inflation and the labour market,” governor Philip Lowe said.
“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time,” he added.
But while market expectations point to a rate of well over 3 per cent, AMP’s Shane Oliver believes that while the RBA “will probably hike by 0.5 per cent in August”, more gradual moves will then bring the rate to 2.1 per cent by year end.
The chief economist expects a peak of around 2.5 per cent in the first half of next year, ahead of rate cuts in the second half of 2023.
“The bottom line is that RBA monetary tightening continues to appear to be getting traction earlier than would normally occur in an interest rate tightening cycle. All of which will start to take pressure off inflation and limit the amount by which the RBA will ultimately need to raise the cash rate by,” Dr Oliver said.
ANZ too is backing a 50-bp lift in August, while its year-end forecast sits at 2.35 per cent.
“Job vacancies and ANZ job ads indicate the labour market is still tightening, increasing the urgency of the RBA’s need to get to at least neutral,” said ANZ economist David Plank.
‘The RBA is not stupid’
Explaining the matter further on a podcast hosted by InvestorDaily’s sister brand ifa in June, Dr Oliver said that given the heightened sensitivity of Australian households to higher interest rates because of higher debt levels, the RBA “won’t have to and won’t go to those very high levels” predicted by the markets.
“I think the Reserve Bank is not stupid, it knows that there’s more debt out there. It knows that people are more sensitive than in the past to higher interest rates. And it also knows that there’s been a big blow to household income,” he continued.
“So, I think the Reserve Bank won’t ignore those things and therefore they won’t have to raise interest rates as much as many fear in this environment.”
