Interest rates could go up twice before Christmas, economists warn

Persistent inflation pressures and stubbornly strong economic data will push the ­RBA into delivering another two interest rate hikes before Christmas, economists say.

It never rains, it pours... economists and investors see the chance of a second additional rate hike if the RBA board moves again on Melbourne Cup day. Picture: NCA NewsWire / Nicholas Eagar

Persistent inflation pressures backed up by stubbornly strong economic data will push the ­Reserve Bank into delivering another two interest rate hikes, economists say, despite anecdotal evidence that households are struggling to make ends meet amid a cost-of-living crunch.

Analysts are almost unanimous in predicting that the central bank board will on Tuesday end a four-month pause and ­deliver its 13th interest rate rise in 18 months. Financial markets are pricing in a 70 per cent chance of a Melbourne Cup day increase that would take the cash rate to 4.35 per cent, and a nearly 25 per cent chance of a second move at the ­following RBA board meeting on December 5.

Oxford Economics Australia chief economist Sean Langcake said underlying inflation of 5.2 per cent in the year to September was too high for the RBA to ignore and would make reaching the end-of-year forecasts virtually impossible.

“I thought they were being optimistic when they paused in July, although I wouldn’t necessarily say it was a mistake,” Mr Langcake said. “It will be a somewhat reluctant hike from them (on Tuesday), but given they are coming back to the table then they could go back-to-back.

It was “very plausible”, however, that the follow-up hike could be delayed until February, he said. “I think the fact that retail volumes (which are after inflation) ticked up in the September quarter is key,” Mr Langcake said.

“We’ve had this neat story of belt tightening, and that things are really slowing, and the increase in retail volumes runs counter to that.”

NAB head of market economics Tapas Strickland said he anticipated a 0.25 percentage point move on Tuesday afternoon, and that new RBA governor Michele Bullock’s statement accompanying the decision would maintain the existing “tightening bias”, ­suggesting there was a “real risk” of a follow-up move next month or in February.

“Another 50 basis points (half a percentage point) would probably be enough, and I think it’s a reasonable assumption we get to 4.6 per cent,” Mr Strickland said.

Mr Strickland said rate hikes were justified by the worrying persistence of inflationary pressures, and pointed to the fact that the level of interest rates in this country was below other advanced economies, where policy rates are generally higher than 5 per cent. He also pointed to Westpac’s profit results release on Monday, which showed the past year’s soaring interest rates had had virtually no impact on the share of customers falling behind on their home loans, or in the levels of prepayment buffers.

But KPMG chief economist Brendan Rynne said while he expected a Melbourne Cup day hike, he didn’t agree that there was a strong enough case for one.

With bond rates shooting ­higher in recent months, banks would be passing on higher ­funding costs to their customers even without an official rate rise, Dr Rynne said.

And the September monthly inflation figures showed price pressures were receding; and where they weren’t, they were in areas such as rents and petrol prices, which the RBA could do little about, he said.