‘Incredibly difficult’: RBA prepares 10th straight rate hike, despite slowing economy

RBA governor Philip Lowe is set to unveil another rate hike on Tuesday.

RBA governor Philip Lowe is set to unveil another rate hike on Tuesday. Photo: TND

Struggling home owners face more bad news this week as the Reserve Bank prepares, in the view of most economists, to pass through a 10th straight interest rate hike on Tuesday.

The cost of servicing a 25-year, $500,000 mortgage has already risen by $908 a month since May, and if forecasts hold another 0.25 percentage point hike will take that rise to $983.

It’s already the fastest spate of cash-rate hikes the RBA has pursued, and after governor Philip Lowe kicked off 2023 in a hawkish tone, economists expect at least two more increases.

“Three of the big four bank economists still predict the cash rate will get to 4.10 per cent by May,” RateCity research director Sally Tindall said.

“If that happens, someone with a $500,000 loan at the start of the hikes is looking at a total increase of over $1000 on their mortgage. For many people, this will be an incredibly difficult hurdle to clear. For some, it could prove impossible.”

But as each month trundles on, the case for more rate rises is growing thinner as the risk of a recession becomes larger, economists believe.

With that in mind, households could be in for a reprieve on the back of some softer-than-expected economic data in the past fortnight.

Interest rates to rise despite slowing economy

The vast majority of experts expect rates to rise again on Tuesday, with 93 per cent of economists telling a Finder survey that the RBA will continue to hike in a bid to curb inflation.

Almost as many (86 per cent) expect the quantum of the hike will be 0.25 percentage points, taking the cash rate target to 3.60 per cent – which would be the highest level in over a decade.

Monash University’s Mark Crosby said the RBA will keep hiking until new inflation data comes.

“[The RBA] still indicates [there’s] more to do to bring inflation under control, so [they’re] likely to raise at least twice more before the next inflation read tells a tale,” he said.

However, independent economist Nicki Hutley says the RBA must strike a delicate balance, particularly after inflation and quarterly economic growth data were weaker than forecast.

Last week saw the release of prices data in January – revealing that the pace of inflation is easing in the new year – and GDP figures that revealed the economy was slowing in December.

Annual headline inflation eased from 8.4 per cent to 7.4 per cent over January, while the pace of economic growth slowed to levels not seen since Delta COVID-19 lockdowns in 2021 amid a sharp fall in consumer demand.

And Ms Hutley says that suggests the RBA’s existing rate hikes are starting to work, making the case for further increases much weaker.

“The question is whether the cure is worse than the disease at this point,” Ms Hutley said.

“In this case it may well be … I don’t mean to be alarmist, but if they don’t change their language and their stance there continues to be a big risk [of a downturn].”

Economist Craig Emerson offered a similar perspective, saying “the RBA seems hellbent on engineering a recession”.

One main reason the RBA has started off 2023 with such a hawkish tone is that it fears inflation expectations will trend upwards if the rate of price hikes remains above its 2 to 3 per cent target band for too long.

And if that happens, as explained previously, it will be much harder to bring inflation back down – requiring even bigger interest rate hikes.

“If we don’t get on top of inflation, it means even higher interest rates and more unemployment,” Dr Lowe told a Parliamentary hearing in February.

Stay informed, daily
A FREE subscription to The New Daily arrives every morning and evening.
The New Daily is a trusted source of national news and information and is provided free for all Australians. Read our editorial charter.
Copyright © 2024 The New Daily.
All rights reserved.