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RBA expects rate hike as inflation rises


Mortgage holders are widely expected to face another round of financial pain, with experts pushing interest rates higher.

The Reserve Bank of Australia (RBA) holds its monthly meeting on Tuesday afternoon at 2.30pm AEST.

Australia’s central bank has hiked rates every month since May last year, with the exception of April 2023, when rates were temporarily suspended.

Experts hoped that June was also headed for another halt, giving the nation some much-needed reprieve, but those hopes were dashed.

Higher-than-expected inflation numbers from the Bureau of Statistics — which stood at 6.8 percent in the 12 months to April — coupled with the Fair Work Commission’s minimum wage increase, have all but sealed the fate of homeowners, some economists say.

Markets are widely predicting another interest rate hike, essentially raising the probability from less than 10 percent to 42 percent.

A recent survey from comparison site Finder said nearly half of an expert panel had planned for the rate to rise, and the consensus was that it would be increased by 25 basis points, bringing the cash rate to 4.10 percent.

Finder’s head of consumer research Graham Cooke warned that the sobering inflation results would likely “trigger” another rate hike, or two, and then the final interest rate would be reached, eventually abating the “floods”.

“Despite the RBA’s board being heavily criticized for its unprecedented series of rate hikes, the recent rise in inflation may be enough to trigger another rate hike,” Cooke said.

“Our experts predict a maximum of 2 more rate increases this year. After that, the floodwaters should begin to recede.”

Since May 2022, cash rates have fallen from an all-time low of 0.1 percent to an increase of 375 basis points.

Australia’s current cash rate is the highest in 11 years amid the fastest tightening cycle on record.

For context, the RBA’s inflation target is to keep consumer price inflation at an average of between two and three percent over time. The country’s current figure is nowhere near that, at 6.8 percent.

Two of Australia’s four largest banks – the CBA and Westpac – have marked 3.85 per cent as the final spot rate, meaning they believe the current rate will be the peak, which is good news for cash-strapped borrowers .

CBA thinks the rate will pause and drop again to 2.6 percent next August.

Meanwhile, Westpac thinks the worst is over and will bottom out at 2.10 percent in May next year, two years after interest rates started rising.

However, both banks may want to revise their outlook given the new inflation figures.

ANZ and NAB, on the other hand, had more sobering predictions.

NAB thinks the rate will be paused this month, but will rise to 4.10 percent in July and then fall to 3.10 percent over the next 12 months.

ANZ had the gloomiest forecast of all, predicting 4.35 percent to be the closing rate, which will not be reached until August.

On Monday, ahead of an upcoming RBA cash rate decision on Tuesday, Deutsche Bank revised its peak cash rate forecast from 4.1 percent in August to 4.6 percent in September.

Phil O’Donoghue, chief economist at Deutsche Bank, warned: “We are now anticipating the likelihood of multiple rate hikes before the end of the year. The only uncertainty left for us is when these walks will take place.”

On Friday, the Fair Work Commission announced that starting July 1, new pay rates will go into effect for 184,000 national minimum wage workers, who will enjoy a record 8.6 percent increase.

An additional 2.5 million workers who depend on benefits will also enjoy a wage increase, albeit not as high, at 5.75 percent.

The announcement came just three days before the Reserve Bank will hold its monthly meeting for June to decide whether to raise interest rates again.

In a note, AMP chief economist Shane Oliver wrote, “The RBA will be concerned that inflation is too high.

“The latest minimum and bonus wage hikes now unfortunately make further RBA rate hikes likely.”

Dr. Oliver said the cash rate is likely to rise – it’s just a matter of whether it will be this month or next month.

“Or if not on Tuesday, then in July,” he added.

“The money market has now priced in a 42 percent chance of a 0.25 percent rate hike on Tuesday and an 80 percent chance by July.”

Joanna Swanson

Joanna Swanson is Europe correspondent at the Thomson Reuters Foundation based in Brussels covering politics, culture, business, climate change, society, economies and inclusive tech. With specific focus in breaking news, she has covered some of the world's most significant stories.