‘Line ball’: Experts split as RBA mulls pivotal interest rates call amid rising mortgage stress

The Reserve Bank is preparing to make a pivotal interest rates call this week and experts are split on what it will be.

The Reserve Bank is preparing to make a pivotal interest rates call this week and experts are split on what it will be. Photo: AAP

Experts are split on whether the Reserve Bank will return to hiking interest rates at its May meeting this week after recent data showed annual inflation has now peaked and is slowing.

Tuesday will mark a year since the RBA began raising interest rates from a record-low 0.1 per cent to a decade-high 3.6 per cent in an effort to slow the economy and curb rising prices.

About $1000 has been added to monthly repayments on a typical $500,000, 25-year home loan as a result, and if the RBA decides to hike rates again this week another $78 could be added.

It would pile even more pressure on family budgets, with Roy Morgan’s mortgage stress index rising to its highest level since September 2008 on Friday – 27.1 per cent of home owners are now ‘at risk’ of defaulting.

But a rate pause is also possible, experts say, after the RBA slammed the brakes on its record-breaking rate rise cycle last month to wait for more data about jobs and inflation in 2023.

Those data showed that while the labour market is still running hot, inflation has begun to slow, sparking a debate among economists about whether the RBA will decide to hike again in May.

Lateral Economics CEO Nicholas Gruen said Tuesday’s interest rates decision will be “line ball”, predicting the RBA will opt to resume hiking.

“The bank may want to raise rates before the budget so as not to be seen to raise them after the budget,” he told Finder’s monthly survey of economists, which found 55 per cent predict a rise.

Veteran economist Saul Eslake, however, is expecting central bankers to keep rates on ice.

“Inflation, though still ‘unacceptably high’, is at least clearly now heading in the right direction,” he said.

“With a good deal of the effects of monetary policy tightening still to be felt, the RBA can again leave its policy settings unchanged.”

Whatever the RBA decides, economists agree that the May decision will be crucial in what the RBA does later this year, with another pause making it likely that the rate-rise cycle is finished.

Commonwealth Bank economist Harry Ottley believes rate rises will finish for some time on Tuesday regardless of the outcome, predicting a final 0.25 percentage point hike is due in May.

“This would take the cash rate to 3.85 per cent, which we think is likely to be the terminal rate,” he said.

CreditorWatch chief economist Anneke Thompson said that if the RBA isn’t already at the peak of the rate cycle, it’s “very, very close”.

“The inflation result was a mixed bag, and services inflation will likely be making the RBA board nervous,” she said.

The home loan arms of the major banks are already starting to price in a peak and eventual cut in interest rates from the RBA, with fixed-interest rates on offer being shaved in recent weeks.

On Friday, National Australia Bank (NAB) joined rivals Commonwealth Bank and ANZ in hiking its variable loan rates while cutting fixed rates, analysis firm RateCity said.

“The big banks are buckling under the pressure of their own ultra-competitive new customer variable rate discounts,” RateCity research director Sally Tindall said.

“With refinancing at a record high, these discounts have become a very expensive exercise for the banks. As a result, they’re inching away from them as quickly and quietly as they can.”

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