RBA to lift cash rate on Tuesday: What to expect?

Highlights

• The Reserve Bank is expected to conduct its second interest rate hike in the June monetary policy meeting.
• Inflationary pressures have taken a toll on households, with little relief offered through wages growth.
• Market expectations of the upcoming rate hike range from 0.25% to 0.40%.

It is time for borrowers to face the music again, as the Reserve Bank is expected to conduct its second interest rate hike in the upcoming monetary policy meeting. Speculations about the magnitude of the rate hike range from about 0.25% to 0.40%, with some experts predicting a rise of as high as 0.50%. The Reserve Bank of Australia (RBA) last raised the cash rate by 0.25% in its May monetary policy meeting.

The biggest reason behind these expectations is rising inflation, which has been cited by several analysts and the new Treasurer, Jim Chalmers. Treasurer Chalmers recently highlighted that inflation would outpace the Coalition government’s budget forecast of 4.25% through the year to June. Experts believe that consumers will be able to manage interest rate hikes, even as soaring living costs weigh heavily on households.

Higher power bills and rising gas prices have created an energy crisis in the country that has increased uncertainty regarding the economic outlook. While some economists expect that the RBA will take the cash rate to 2% by the end of this year, some other economists expect the central bank not to get much aggressive. The upcoming monetary policy meeting is expected to decide the RBA’s subsequent rate hike path, regardless of these expectations.

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High inflation and falling wages

The present scenario in Australia highlights the persistent pressure created by rising prices of goods and services, alongside the soaring commodity prices. International pressures have lifted the prices of essential items, leading to the simultaneous build-up of a food crisis. Experts predict that food prices could remain elevated in the coming months as supply chain disruptions continue.

Meanwhile, low temperatures in Sydney and Melbourne also seem to have heightened price pressures at the wholesale level. Following a forecast spike in wholesale energy prices, the Australian Energy Market Operator recently intervened and set a price cap. The RBA has also taken the tightening route to combat high inflation levels.

At the same time, employees have not received a pay hike that seems worthwhile in a highly inflationary environment. The pace of wage growth in Australia has been slower than the inflation rate, effectively making employees worse off in real terms. The newly elected government needs to tackle pressures from all sides, including a hefty budget deficit.

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What do the banks say?

Economic experts are divided in their opinions about the rate hike that is all set to occur in June. While the Commonwealth Bank of Australia (ASX: CBA) and the National Australia Bank (ASX: NAB) expect a rate hike of 0.25%, The Australia and New Zealand Banking Group Limited (ASX: ANZ) and Westpac Banking Corporation (ASX: WBC) anticipate the rate hike to be as high as 0.40%.

Moreover, consensus dictates that the RBA will conduct more aggressive rate hikes in the coming months. But the extent of the rate hike remains a mystery, much like the RBA’s timeline to raise interest rates for the first time. Previous revelations by the RBA suggest that rate hikes could go as high as 0.40%, which was one of the potential increments being considered by the central bank for the May meeting.

At this point, rate hikes are imminent, but the extent of these hikes is the major point of discussion. Central banks across the globe have conducted major rate hikes in the past few months amidst rising inflationary pressures. Speculations are rife that the upcoming cash rate hike would be no less than 0.25%, which is the general rate hike for the central banks.

For the RBA, the best decision could be to take a tougher stance in the early stages of the tightening cycle rather than later. Since the RBA has delayed its interest rate hike decision, the onus of lifting the economy from inflationary pressures lies heavily on it.

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