Reserve Bank of Australia Expected to Make Another Oversized Rate Hike in October

Pedestrians walk past the Reserve Bank of Australia building in Sydney, Australia, on May 3, 2022. Brook Mitchell/Getty Images

Economic experts are expecting the Reserve Bank of Australia (RBA) to maintain its aggressive interest rate policy with another oversized rate hike in October as troubling global economic conditions remain.

The RBA said it would opt between a 0.25 and 0.5 percent hike at the next board meeting on Oct. 5 and that it would consider the global economic outlook and consumer spending habits when making the decision.

Royal Bank of Canada economist Su-Lin Ong predicted that the October rate hike would be a 0.5 percent increase, citing the hawkish stance of central banks around the world.

“With the Australian dollar falling further as global rate expectations reset, adding to domestic inflationary pressures, the RBA remains under pressure to also deliver an outsized rate hike,” Ong said.

Nevertheless, she noted that the RBA would likely maintain a lower “neutral rate”, the interest rate that neither stimulates nor deflates economic activity, than its international counterparts due to high levels of household debt and variable rate mortgages taken by homeowners.

Separately, ANZ economists forecasted that the RBA would end its tightening cycle when the neutral rate reached 3.35 percent. However, they said there was a chance the rate would go higher.

“The RBA seems ready to slow the pace of hikes, but global experience suggests more work needs to be done,” ANZ economists said.

“We expect the cash rate to rise to 3.35 percent by year-end, but the risks are growing that a higher cash rate will be needed to quash inflation.”

OECD Downgrades Australia’s Economic Outlook

Meanwhile, a report by the Organisation for Economic Co-operation and Development (OECD) indicated that while Australia’s economy might perform better than those of Europe and the United States, the country was still impacted by the gloomy global outlook.

In its latest interim report, the OECD downgraded Australia’s economic position and projected the country’s real GDP to grow by 4.1 percent in 2022 and two percent in 2023. This represented a drop of 0.1 and 0.5 percentage points, respectively, compared to the June forecasts.

Cargo is loaded onto ships in the Port of Melbourne, in Australia, on Sept. 9, 2021. William West/AFP via Getty Images

At the same time, the organisation expected Australia’s core inflation to reach 5.4 percent in 2022 before dipping to 4.3 percent in 2023.

Treasurer Jim Chalmers agreed with the OECD’s view on the prospect of the Australian economy.

“The OECD report shows the global economy is treading perilous terrain – with slowing global growth, rampant inflation, falling real wages, and extreme uncertainty,” he said.

“These challenges are intensifying, not dissipating, and Australia is not spared from this darker and more dangerous global outlook.”

However, he said there was reason to be optimistic about the longer-term future of the Australian economy and noted that his October budget would focus on delivering “responsible” living cost relief.