Official interest rate to hit 4.1 per cent by August, Deutsche predicts

Philip Lowe’s Reserve Bank will lift interest rates in February, March, May and August — that’s the scary new prediction from one of the best economists in the business.

Four more RBA rate rises between now and August – that’s the new prediction by the top economist of one of the world’s biggest investment banks.

Deutsche Bank’s Phil O’Donaghoe also told The Daily Telegraph that he expects the unemployment rate to rise from 3.5 per cent to 4.5 per cent by this time next year, putting about 100,000 Australians out of work.

Mr O’Donaghoe has been one of the more conservative forecasters leading into and during the unprecedented run of Reserve Bank of Australia rate hikes, which makes his prediction of 0.25 percentage point increases in February, March, May and August all the more significant.

That would take the RBA cash rate from 3.1 per cent to 4.1 per cent, adding about $300 extra to monthly repayment on a $500,000 mortgage.

Those repayments have already surged by about $900 a month since April last year, when the cash rate was just 0.1 per cent.

Philip Lowe and the RBA board will consider a rate hike next week. Picture: Mark Graham

Prior to this week, Mr O’Donaghoe had been expecting just one more tightening – on February 7.

“But after last week’s Consumer Price Index (CPI) and … also the fact that household spending looks like it’s been pretty resilient through Christmas and the start of the year. Put those two things together and I thought 3.35 per cent isn’t going to be enough,” Mr O’Donaghoe said.

The rate hikes could continue until August, Mr O’Donaghoe said.

“The RBA needs to see household consumption slowing a lot to get inflation back to target. I don’t think we are going to see that.”

The RBA’s inflation target is 2 to 3 per cent.

Last week’s CPI figures from the Australian Bureau of Statistics showed the headline rate was at 7.8 per cent.

The RBA’s preferred measure of inflation, the so-called “trimmed mean”, was running at 6.9 per cent.

“That CPI was pretty troubling,” Mr O’Donaghoe said. “There’s a lot of work to do” to get inflation down.

Last week, another massive investment bank, RBC Capital Markets, increased its cash rate forecast from 3.55 per cent to 3.8 per cent, citing the higher than expected CPI figures. Yesterday its analysts floated the possibility of a 50 basis point hike by the RBA next week.

Deutsch’s Mr O’Donaghoe said that should the Reserve lift the cash rate to 4.1 per cent this year, it would likely start cutting early in 2024 to arrest the increase in the unemployment rate and ease cashflow pressure on households.

Originally published as Official interest rate to hit 4.1 per cent by August, Deutsche predicts