Will RBA raise cash rate by 0.50% for second consecutive time tomorrow?

Highlights

• The RBA is likely to deliver an interest rate hike of 50 basis points in its July monetary policy meeting.
• The central bank seems to be making up for a lost time as it delayed its first interest rate hike in the face of rising prices.
• Confidence of consumers and businesses could be hit hard by additional interest rate hikes in Australia.

The Reserve Bank of Australia (RBA) is expected to deliver another blow to consumers in its July monetary policy meeting. Speculations are rife that the RBA might conduct another 50-basis-point hike tomorrow. The interest rate hikes have been introduced as a part of the central bank’s efforts to curb inflation.

The RBA is not alone on a rate hiking spree, as most central banks across the globe have been increasing their interest rates. However, the RBA has maintained a streak of surprising the market with unprecedented rate hikes. The RBA began its rate hike cycle in May, delivering a higher-than-expected hike of 0.25%. This was followed by another larger-than-expected hike of 0.50% in June.

The market was unprepared for a sudden surge in the interest rate to 0.85%. Of late, market forecasters are speculating the RBA to follow the US Fed and raise interest rates by 0.75%. Nevertheless, RBA Governor Phillip Lowe has repeatedly indicated that such massive upticks may not be a possibility.

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Are faster rate hikes needed to ward off inflation?

The market, at large, had been prepared for aggressive monetary policy tightening by the RBA. Most banks have been expecting the RBA to take a stringent approach to rate hikes. This includes the big four banks, Australia and New Zealand Banking Group Limited (ASX: ANZ), Westpac Banking Corporation (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Limited (ASX:NAB). These banks expect a 50-basis-point interest rate hike on July 5.

Meanwhile, economists also expect the RBA to continue on the current path of monetary policy tightening, with some anticipating the cash rate to reach 2% or higher by the end of September. These expectations from economists further suggest that interest rates could surge to 2.35% by the end of 2022. However, the market forecasts interest rates to reach 3% by the end of 2022.

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The pressure seems to be increasing on the RBA as it has delayed its interest rate hike decision for a long. Australia was one of the last countries to see an increase in interest rates during the period of rising inflation. The RBA introduced its first rate hike at a time when most central banks were on their third or fourth rate hike decision.

This delay appears to have cost the RBA much valuable time as now it must take swift action to curb inflation. The RBA has followed in the footsteps of the US Fed, which also gave a delayed response to rising inflation. However, inflation levels in the US have been much higher than the ones seen across the rest of the world. Thus, the RBA might diverge in its third interest rate hike by not embracing an aggressive approach of raising rates by 0.75%.

Consumers and businesses could suffer

In an economy with declining consumer confidence, interest rate hikes can severely damage the spending capacity of households. As per the latest Roy Morgan data, businesses have also been depicting lower confidence.

The Roy Morgan Business Confidence fell by 2.9% in June, marking the second monthly fall in the index. The fall in business confidence largely stemmed from the change in government and rising concerns about the performance of the Australian economy. Although businesses are positive about their own prospects, they are worried about the economy’s performance over the next year.

Amid these concerning factors, the upcoming interest rate hike could further dampen consumer and business confidence in Australia. However, rising interest rates seem to be a necessary tool to keep inflationary pressures under check.