Australia prepares for fourth consecutive 0.5% key rate hike

The Reserve Bank will raise its target overnight rate at Tuesday's meeting, according to 27 of 30 economists surveyed by Bloomberg. The increase is expected to be a half percentage point to 2.35 percent. This will be the fourth such increase in a row.

AMP Capital Markets senior economist Diane Musina said the RBA was conducting tightening cycles differently than usual — concerns are caused by high inflation, so the bank is taking decisive action.

Consumer price growth in the second quarter was 6.1%, double the top end of the RBA's 2-3% target, and is expected to peak around 8% later this year.

The combined effects of the pandemic and an unemployment rate of 3.4% have helped boost household spending. The economy is expected to grow thanks to an increase in retail sales of 1.3% in July, as well as rising prices for export goods.

A private report released Monday showed that the number of vacancy announcements in Australia hit a new high in August, indicating steady demand for labor.

All of the above factors suggest that the interest rate hike has yet to have a significant impact on demand. On Wednesday, GDP data is due out. It is projected to be up 1% in the last quarter from the previous quarter and 3.5% from a year earlier.

Even so, the housing market is struggling to cope with a 1.75-point rate hike in the four months since May, when the interest rate was 0.1% -- marking the fastest rate of price decline since 1983.

Representatives of the Commonwealth Bank of Australia, the country's largest lender, said that the RBA's rate hike does not begin to have an impact on households until three months later. This implies that the initial rate hike has only now become tangible for households. It is also important to note the fact that about a third of all mortgages are on fixed terms, thus protecting them from tightening.

This makes it easy to understand why consumer spending in Australia remains high.

Gareth Aird, head of Australian economics at Commonwealth Bank of Australia, which accounts for a quarter of Australia's mortgage market, said rate hikes are belatedly but beginning to affect the cash flow of many households, which will require families with mortgages to adjust their spending.

RBA policymakers are trying to ensure that economic growth declines smoothly, avoiding an economic downturn and high unemployment. They admit that it is difficult to pursue a policy of lower inflation at the same time as keeping the economy growing steadily. A Bloomberg survey showed a 23% chance of recession over the next year, according to economists' average estimates.