Australia’s economy is doing better than expected and this may force the RBA to raise rates by 0.75 percentage points next month.
Some experts predict that interest rates could rise a whopping 0.75 percentage points next month.
Deutsche Bank’s chief economist for Australia, Phil O’Donoghue, points out that the Reserve Bank will raise the cash rate from 1.35% to 2.1% at its August meeting.
Nomura senior economist Andrew Ticehurst also expects the cash rate to rise 0.75 percentage points and may even reach 2.35 percent. The last time the cash rate increased by one percentage point was in December 1994.
Forecasts follow better-than-expected employment data in June, with unemployment falling to a 48-year low of 3.5 percent.
Many believe this will block a further rate hike of at least 0.5 percentage points.
Forecasts that inflation could reach 7 percent also add fuel to speculation that they may need larger rate hikes.
O’Donoghue believes inflation and demand in the economy are still high and Australia could find itself in a “wage price spiral”.
This was seen in the 1960s and 1970s, when inflation was not controlled enough, and firms began to continually raise their prices to cover the spiral of wage costs.
“If you don’t curb these inflationary pressures in the short term, you end up with five or ten years with fewer jobs,” O’Donoghue told the 2GB Money News program.
He said if the RBA raised rates next month by 0.75 percentage points, it would send a message that the bank was intolerant of inflation above the target and the threat of a wage price spiral.
The RBA has already raised interest rates by 0.5 percentage points over the past three months and if it acted more aggressively next month, that would exceed the expectations of many economists.
While ASX’s 30-day interbank-type futures predict the cash rate could rise as much as 3.5 percent in May next year, ANZ Capital chief economist Shane Oliver he didn’t think the rate hikes would get that far.
“If the cash rate reached 3.5 percent, the real estate market would crash and we would be in a deep recession,” he told news.com.au earlier this month.
“For someone who has a $ 600,000 loan, their mortgage bill has already risen to about $ 420 a month, which is more than an additional $ 5,000 a year.
“If there’s an increase of about 3 percent in the cash rate, that would increase to about $ 12,000 a year.”
Oliver believes the cash rate will likely reach 2.5 percent early next year.
“I think at the next August meeting we will see another 0.5 percentage point increase [to 1.85 per cent]and another 0.25 [per cent] walk [to 2.1 per cent] at the end of the year, ”he said.
“If we get a few 0.25 [per cent] rises at the beginning of next year, I think at the beginning of next year we will reach 2.5 per cent; the exact figure could be 2.6 percent.
“I think we will reach the maximum around February or March, which is similar to the graphs’ predictions for the money market, but it’s only at a lower level.”
Ultimately, Oliver believes the RBA will raise rates until it believes the economy is under control.
– With Charis Chang
Read related topics: Reserve Bank