Shock inflation data will drive RBA to deliver a double rate hike

More than three million households with a mortgage are poised to be losers on Melbourne Cup Day, with Westpac chief economist Bill Evans now predicting a double rate hike.

Adding half a percentage point on to mortgages would increase monthly repayments on a $750,000 loan by $225.

More than three million households with a mortgage are poised to be losers on Melbourne Cup day, with leading economists predicting hot inflation data will force the Reserve Bank to deliver a double rate hike and increase the risk of a recession in 2023.

Adding half a percentage point on to mortgages would increase monthly repayments on a $750,000 loan by $225, bringing the total additional interest burden since the RBA began hiking in May to $1250 a month, according to RateCity.

With analysts factoring in sharper rate hikes over the coming six months, climbing borrowing costs will heap further pain on families facing a 30 per cent surge in electricity prices this financial year, alongside sharp increases in the cost of groceries.

Westpac chief economist Bill Evans became the first big bank economist to break from the consensus and forecast the RBA board would lift the cash rate from 2.6 per cent to 3.1 per cent when it meets on Tuesday, rather than 2.85 per cent.

The trigger was Wednesday’s consumer price index data, which showed inflation had accelerated from 6.1 per cent in June to a hotter-than-expected 7.3 per cent over the year to September, spurred in part by an 11 per cent quarterly jump in gas prices.

Mr Evans said the Australian Bureau of Statistics data came as a major surprise. “If the inflation ­report had been in line with expectations, then continuing the sequence of 25 (basis-point) moves would have been appropriate,” he said. “But not responding firmly to this genuine shock would risk the impression of a central bank that is less than fully committed to the inflation task. This would risk further embedding a high inflation psychology into the Australian economy.”

Barrenjoey chief economist Jo Masters also backed in a hike to 3.1 per cent next week, although she said the outcome would be “finely balanced” and that it would not be an easy decision for a central bank committed to taming inflation without triggering a major downturn. “We think this (a half-a-percentage-point rate hike) will pay a dividend to the RBA’s resolute credibility to bring inflation down and highlight that with policy now in the neutral zone the board will assess the incoming data each time it sits down,” Ms Masters said.

Rates were now on track to reach 3.6 per cent by February, she said, against a previously forecast peak of 3.1 per cent, and that two quarters of economic contraction was “certainly possible”.

“We already had the economy skirting recession,” she said.

Other analysts have responded to the ABS price figures by similarly factoring in one or two additional quarter-point hikes in coming months, lifting the forecast rates peak from the low- to mid-threes.

Mr Evans said the official cash rate target would reach 3.85 per cent by March, while financial markets factor in a rate of 4.1 per cent by around mid-2023 – a level a number of economists believe would crash the property market and the economy.

AMP Capital chief economist Shane Oliver said the RBA would stick to a 0.25 percentage point move, saying the inflation figures were “broadly consistent with the RBA’s forecast profile”.

Dr Oliver said reasons to raise rates more cautiously remained, including that households were yet to feel the full force of this year’s monetary policy tightening, and the increasingly gloomy global economic outlook.

He said if rates approached 4 per cent by the middle of next year there would be a recession.

“That will take households’ debt servicing payments to record levels,” he said.

Jim Chalmers this week dubbed inflation “public enemy No. 1”, after crafting a budget that placed spending restraint at its core in order to avoid adding pressure to consumer prices, despite growing cost-of-living pressures on households.