RBA to hike rates by 50 points on October 4

On Tuesday, the Reserve Bank of Australia (RBA) will raise interest rates by half a percentage point. The rate hike will come as part of the most aggressive tightening cycle since the 1990s to curb inflation, according to a Reuters poll.

At a meeting of the Reserve Bank of Australia (RBA) held in August, Philip Low softened recommendations for further rate hikes as they approached the expected level of 2.50%. This neutral, as it is also called, level does not contribute to either stimulation or restriction of economic activity.

But with the US Federal Reserve (the Fed) raising rates by 75 basis points last week and is expected to raise borrowing costs even more than previously expected. Many central banks are likely to follow suit to prevent further weakening of their currencies against the US dollar.

According to a Reuters poll, over 70% or 21 out of 29 economists predicted that the RBA would raise interest rates by half a percentage point to 2.85% at its October 4 meeting.

If this becomes a reality, it will be the fifth consecutive increase of 50 basis points increase, and at the same time the fastest cycle of growth since 1994. Back then, rates rose from 4.75% to 7.50%.

According to Tony Morris, head of economics at Bank of America Australia and New Zealand, there are high expectations for global interest rates in the United States.

“If the Reserve Bank does not maintain the current pace, then further currency weakness will lead to a much faster pace of domestic inflation.”

Even though the median forecast showed rates rising by another 50 basis points in the next quarter and peaking at 3.35%, economists’ opinions on what these rates will be by the end of 2022 are divided into five positions.

While 11 out of 27 economists held the median view, one said 3.50%, and two said 3.60%. Among the remaining 13 economists, ten said rates would be at 3.10% by the end of the year, and three said rates would be at 2.85%.

Only 4 out of 29 economists predicted a 3.35% cash rate by the end of 2022 in an August survey when the peak rate was expected to be 3.10%.

 “Our expectations are driven by several factors, namely medium-term inflation expectations, which remain well anchored, as well as wage growth and easing global inflationary pressures,” said Jameson Coombs, an economist at St. George Bank.

"If higher inflation risks materialize, the RBA board may have to beat our expectations about terminal rate."