The Reserve Bank is “near the summit” in its quest to curb the fastest rate of inflation in a generation after it announced a 0.25 basis points interest rate hike on Tuesday, signalling a turning point in its strategy, leading economists say.
RBA governor Philip Lowe announced the record-breaking sixth rate hike that takes the cash rate target to 2.6 per cent and adds another $74 to typical monthly mortgage bills.
With rates at their highest level since June 2013, about $687 has been added to monthly repayments on a typical 25-year $500,000 mortgage since the RBA moved rates from record lows in May.
The goal is to squeeze household budgets enough so consumers spend less on goods and services, making it harder for businesses to raise prices further – therefore reducing the inflation rate.
October’s increase was half the size of the previous five hikes, a sign the central bank’s strategy to curb soaring inflation has changed.
Rates in ‘neutral territory’
BIS Oxford senior economist Sean Langcake said the RBA was “near the summit” of rate increases, with just two more 0.25 percentage point hikes expected in November and December.
He said rates were in so-called “neutral territory” – where they are neither supporting or restricting economic growth.
“They’ve gotten to neutral territory really quickly and they can now sit back and respond to the data a little bit more,” Mr Langcake told TND.
KPMG senior economist Sarah Hunter said a 0.25 percentage point hike in October showed the RBA was watching the effect of earlier rate hikes on the economy.
“It signals we are at the end of the 0.50 percentage point hikes or other outsized rate rises,” Dr Hunter told TND.
“We’re not at the end of hikes by any stretch, but we’re back to more of a normal size of increase, assuming we don’t get any other big surprises.”
Dr Hunter also expected two more 0.25 percentage point rises this year and “maybe” another few early next year, depending on inflation data.
The Reserve Bank expects inflation to peak at 7.8 per cent in the December quarter before easing to 6.2 per cent in June next year.
Headline inflation was 6.1 per cent in the June quarter, a 30-year high.
APAC economist Callam Pickering said the October hike is a sign the RBA might pause rates in the coming months.
“They’re understandably a little bit cautious about what they’re going to do moving forward. They’ve moved rates so much already, but the impact of changes takes some time to flow through.”
More rate hikes to come: Lowe
Dr Lowe said on Tuesday that further rate increases would be needed to bring inflation back to the RBA’s target band of 2 to 3 per cent.
Tuesday’s hike will help “achieve a more sustainable balance of demand and supply in the Australian economy”.
“One source of uncertainty is the outlook for the global economy, which has deteriorated recently. Another is how household spending in Australia responds to the tighter financial conditions,” Dr Lowe said.
“Higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments.
“Consumer confidence has also fallen and housing prices are declining after the earlier large increases.
“Working in the other direction, people are finding jobs, gaining more hours of work and receiving higher wages.
“Many households have also built up large financial buffers and the saving rate still remains higher than it was before the pandemic.”