Economist and former RBA Board Member John Edwards expects four interest rate hikes by year end

The central bank may lift interest rates four times in quick succession late in 2022, according to economist and former RBA board member John Edwards.

RBA Governor Philip Lowe conceded last week that a tightening of the monetary policy screws in 2022 was a “plausible scenario.”. Picture: Jeremy Piper/NCA NewsWire

The Reserve Bank of Australia could raise interest rates four times in quick succession late in 2022 given the current upward trajectory of the economy, according to economist John Edwards, a former member of the central bank’s policy-setting board.

At present, the RBA has the luxury of waiting to see how economic data evolves, but will be on the move by August, embarking on a steady stream of increases to the Official Cash Rate, Mr Edwards said in an interview.

“There is no point in one increase, it will be slow and incremental,” he said.

The scenario painted implies the cash rate will reach 1.0 per cent by December from a record low of 0.10 per cent now, a climb which matches moves expected by government bond traders, but one that easily outpaces current thinking at the RBA.

RBA Governor Philip Lowe conceded last week that a tightening of the monetary policy screws in 2022 was a “plausible scenario.” Still, the central bank’s guidance remains focused on 2023, meaning the first interest rate increase since 2010 could still be a year away.

Mr Lowe said last week he wanted to wait until that the economy was close to achieving full employment, given that economic growth is strong and inflation low. The RBA forecasts that unemployment will soon fall below 4.0 per cent, its lowest levels since the 1970s.

“Australia is within sight of a historic milestone — having the national unemployment rate below 4 per cent,” Mr Lowe told the National Press Club last week. “This is important because low unemployment brings with it very real economic and social benefits for many Australians and their communities.”

Mr Lowe also conceded that there is gulf between thinking in financial markets and the RBA.

Still, full employment is part of the RBA’s mandate and it is worth pursuing as the inflation threat in Australia was not of the scale seen in other countries, Mr Lowe said.

Mr Edwards said that the cautious plod of the RBA could end quickly.

“I would expect the RBA would now think a hike in May was perhaps too early to begin tightening by small steps at the short end, but by August on the current economic trajectory, it will have begun to move,” Mr Edwards said.

“It may be the end of this year before the cash rate approaches 100 basis points, which is still very low,” he said.

A former chief economist at HSBC in Australia, Mr Edwards served on the RBA’s policy-setting board from 2011 to 2016, a period when the economy was bouncing back from the global financial crisis.

The prediction of interest rate increases this year comes after Goldman Sachs warned that the RBA is being “complacent” about global inflation risks, while other central banks are already raising interest rates to address the worst inflation threat since the 1980s.

Meanwhile, Australian banks such as Australia and New Zealand Banking Group and the Bank of Queensland are arguing that even hawkish bond traders are badly underestimating just how far the RBA will need to raise the cash rate over coming years to quell inflation.

But for now, the RBA has the luxury of waiting to see how the economic data develops, Mr Edwards said.

“Despite having lower headline inflation and lower wages growth, unemployment is also unexpectedly low and GDP growth reasonably strong. The RBA could scarcely have imagined it would be in more favourable circumstances,” Mr Edwards said.

The RBA, which ended its government bond purchases this month, may begin running down its bond inventory after May, but at a pace which has little effect on the economy, he said.

Dow Jones Newswires