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  • Writer's pictureFlow Australia

Odds shorten on unpopular result in rates decision

Getting inflation back to target is proving challenging and the Reserve Bank of Australia is widely expected to lift interest rates further to finish the job.

The festive season could be soured by another round of interest rate pain if the Reserve Bank board decides more tightening is needed to drive inflation down. 

A 25 basis point hike remains possible in the home stretch into the meeting on Melbourne Cup day, which would take the cash rate to 4.35 per cent. 

After lifting interest rates assertively since May last year, the RBA has been on hold at 4.1 per cent for four months in a row, suggesting the tightening cycle is drawing to a close. 

Markets were implying a 50-50 chance of a hike on Tuesday, yet economics teams at all big four banks were in favour of a 25 basis point increase.

Most economists polled by Reuters - 34 of 39 - said the RBA would lift the cash rate by 0.25 percentage points.

RBA governor Michele Bullock is wary of a slower return to target than the 2025 forecasted timeline for fear inflation expectations becoming unanchored.

The concern is that once households come to expect high levels of inflation into the future, they adjust their behaviour accordingly and this influences actual price movements.

The board will consider an updated set of economic forecasts alongside strong inflation data - particularly underlying measures - and signs of relative resilience in household spending and the labour market. 

Yet higher interest rates are already taking a toll on Australian households.

Finance Brokers Association of Australia managing director Peter White said he was "deeply concerned" by predictions of another interest rate rise.

"Australia's finance and mortgage brokers are not health professionals, but we do hear the human stories as we assist many people who are struggling to make repayments far higher than what they were paying and had budgeted for," he said,

Surveying by the organisation revealed a spike in people seeking counselling to cope with higher interest rates, he said. 

The challenging economic conditions have also been weighing on consumer confidence, though the weekly index from ANZ and Roy Morgan picked up 2.8 points last week.

"Confidence is still stuck at very weak levels as high inflation and increased interest payments erode households' ability to save and spend," ANZ senior economist Adelaide Timbrell said. 

Inflation expectations as tracked by the index also nudged higher, lifting 0.3 percentage points to 5.5 per cent.

High petrol prices were likely behind the pick up in household inflation expectations over the week, Ms Timbrell said.

"Though overall inflation expectations seem to remain anchored," she added.

The International Monetary Fund has also called on the government to do more to contain inflation so borrowers bear less of the burden of fighting high inflation.

While the organisation called for more monetary tightening, it urged state and federal governments to take pressure off inflation by slowing down the pipeline of public infrastructure projects.

Federal infrastructure minister Catherine King acknowledged the role of the expansive infrastructure pipeline on price pressures and said the government was searching for opportunities to streamline it.


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