Australia to raise rates as it nears the end of its tightening cycle

Almost all economists agree that the Australian central bank rate will rise on Tuesday by 0.25%, reaching 3.1%. Some economists expect to see a number of more hikes, while others predict that the Reserve Bank of Australia will pause in 2023. Inflation cooling should be carried out without slowing down the economy.

The RBA predicts that inflation will peak at 8% this quarter, followed by a slowdown. A return to the 2-3% target will be accomplished in 2025.

According to RBA Governor Philip Lowe, inflation in Australia will eventually reach the 2% level.

Australia's A$9.7 trillion ($6.6 trillion) real estate market is the main reason why Australia's central bank plans to act slowly. Households in Australia are quite sensitive to a sharp tightening of policies, as they are the most indebted in the world.

Although house prices have been falling rapidly since the beginning of this year, the debt on loans is still not very high. Most economists expect to see home prices fall 15-20% from their peak. This is an outcome the economy will likely be able to withstand.

Given the prevalence of floating-rate mortgages, the implementation of such a policy by the Australian central bank may be more effective. This means that a few months after the central bank raises the rate, loan payments will rise.