RBA ‘flying blind’ as economic impact of rate hikes not yet known

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Economists at the big four banks predict another double hike on Tuesday when the RBA’s board meets in September.

The consensus among most economists for this month’s cash rate hike is 50 basis points.

If the RBA increases by 50 basis points, the cash rate will rise to 2.35% – the highest level seen since December 2014.

Another 50 basis point increase would mean 225 basis points of tightening was achieved in just four months amid galloping inflation.

Westpac chief economist Bill Evans is confident that the RBA will raise the cash rate by another 50 basis points.

“Increasing the cash rate by 50 basis points will move the cash rate into the ‘neutral zone’,” Evans said.

A neutral cash rate target refers to a target that is neither economically stimulating nor restrictive.

“Having quickly moved the policy into this neutral zone – 225 basis points in four months or five meetings – we expect the Board to decide to slow the pace of increases to 25 basis points from the October meeting. “said Mr. Evans.

“This second stage of the tightening process, with consecutive increases of 25 basis points, is expected to extend through February next year with a peak rate of 3.35%.”

Mr Evans said keeping the cash rate at 3.35% until 2023 is crucial to help bring inflation back close to the underlying 3% target.


AMP Chief Economist Shane Oliver said a 50 basis point hike is likely, but a 25 basis point hike could also be considered.

“Given the lags involved in the impact of monetary policy on the economy, many households have yet to see the full impact of rate hikes and the fixed rate cliff has yet to have an impact. mainly next year,” Mr Oliver said.

“It makes sense for the RBA to slow the pace of tightening to allow time to assess the impact of the rate hikes so far.

“A 40 basis point move could be a good compromise and bring the exchange rate back to a more ‘normal’ figure.

“We still see the cash rate peaking at 2.6% later this year or early next year.”

See also: When will rising interest rates stop?

The RBA doesn’t need to tighten as much as the US Fed

CommBank’s head of Australian economics, Gareth Aird, said while the board could justify a cash rate hike of 25 or 40 basis points, it’s unlikely to happen.

“We expect the RBA to raise the cash rate by another 50 basis points next week, to 2.35%,” Mr Aird said.

“We expect this to be the last 50 basis point rate hike by the RBA.

“From here, we expect a further 25 basis point rate hike. [in October] which would bring the cash rate to 2.60%”.

Mr Aird warns that any further rate hikes would likely lead to a recession and said the Reserve Bank of Australia Board should not compare the Australian economy to that of the United States.

“On the one hand, the board may believe that the U.S. Federal Reserve will do some of the heavy lifting on the inflation front by putting downward pressure on U.S. demand and, in turn, on global aggregate demand and tradable goods inflation,” he said.

“But on the other hand, [Fed Chair Jerome] Powell’s rhetoric may mean the board is feeling a greater sense of urgency to bring inflation down.

“It would increase the risk of the RBA continuing a bit longer with aggressive rate hikes of 50 basis points, (but) we don’t think the RBA should go that route.

“Australia’s economy is not in the same place as the US economy right now.”

Furthermore, Mr Aird believes the board is “flying blind” in terms of the economic impact of interest rate hikes.

“We believe that provided the RBA pauses for at least a few months in its tightening cycle when the cash rate is 2.60% or 2.85%, the data will indicate that it is not no need to keep raising the policy rate,” he said. .

“Indeed, raising the cash rate would likely lead to a hard landing in the economy.”

See also: What is stagflation?


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