Reserve Bank of Australia Risks Prolonging Tightening Cycle With Latest Decision: Economists

A general view of the Reserve Bank of Australia building in Sydney, Australia, on May 3, 2022. Brook Mitchell/Getty Images

Economists are concerned that the lower-than-expected interest rate hike in October could cause the Reserve Bank of Australia (RBA) to prolong its tightening cycle and eventually end up driving rates higher to bring down demand for goods and services.

Following the RBA’s latest 0.25 percent increase in the official cash rate, some economists revised their forecasts for the peak rate.

ANZ Bank economists now predict the cash rate to peak at 3.6 percent in May 2023, which is 25 basis points higher than their previous forecast.

They anticipate the RBA to extend the rate hiking cycle and potentially lift the cash rate beyond market expectations.

“The slower pace of rate hikes increases the risk that rates need to go higher than previously expected, as demand remains too strong and [consumer] sentiment is initially boosted by the RBA’s moderation,” ANZ economist David Plank said.

A customer selects limes at a fruit stand in the central business district in Sydney, Australia, on Aug. 16, 2022. Lisa Maree Williams/Getty Images

Meanwhile, Australia’s big four banks have quickly passed on the increase to their customers, with Westpac the first to announce new rates for variable home loans and saving products from Oct. 18.

The Commonwealth Bank, National Australia Bank and the ANZ followed suit by raising their rates by 0.25 percent from Oct. 14.

At its board meeting on Oct. 5, the RBA flagged further interest rate hikes as it predicted inflation to continue to rise in 2022.

JP Morgan analyst Tom Kennedy said the RBA was unlikely to go back to 0.5 percent increases unless the third quarter inflation figures were significantly higher than expected.

“In our view, inflation is still the main driver for near-term monetary policy with the upcoming consumer price index print in focus,” Kennedy said.

Meanwhile, the Australian Industry Group welcomed the change in the RBA’s tightening policy.

“The lower increase of a quarter of a percentage point this month is a positive sign the Reserve Bank is conscious of the risks of going too far too fast,” Ai Group head Innes Willox said.

Consumer Sentiment Sours in The Face of Rate Hikes

As interest rates and inflation continued to hike, consumer sentiment soured, with a report by ANZ–Roy Morgan showing that consumer confidence dropped by 2.6 percent in the week ending Oct. 2.

Minister for financial services Stephen Jones said the federal government was delivering a budget under challenging circumstances and was concerned about how high inflation affected household budgets.

“We know that the independent Reserve Bank has got a strategy to bring those down, and that’s what’s behind the interest rate rises,” he said.

“But as a government, we’ve got to focus on ensuring we don’t make the situation worse and we have a strategy for the near term.”