UPDATE: The RBA has announced a 50 basis point increase to the cash rate in July.
While the RBA is almost certain to hike rates at 2.30pm eastern time today, Reserve Bank Governor Dr Philip Lowe told a UBS panel discussion in Zurich last week that the July rate increase won’t be as high as many are fearing.
According to Dr Lowe, an increase of 75 basis points “is not on the table” as the central bank is likely considering “graduated steps".
“The level of interest rates is still very low for an economy with low unemployment and that is experiencing high inflation,” Dr Lowe said.
“I expect that next month [July] we’ll be having the same discussion at our board meeting: 25 or 50 [basis point increase].”
For context, a 25 basis point increase would add approximately $65 a month to a $500,000 mortgage with 25 years remaining.
Whereas a 50 basis point hike would see the average owner-occupier pay an extra $137 a month on their $500,000 mortgage with 25 years remaining.
What are economists predicting?
Many economists forecast an increase as high as 50 basis points which would mirror last month's result.
AMP chief economist Shane Oliver said cash rates are expected to trend upwards for the rest of this year, but the rate of increase will likely ‘slowdown.’
“The RBA has indicated that a 0.25 or a 0.5 increase is on the table - we think they'll probably go with the 0.5 which will bring the cash rate to 1.35% from 0.85%,” Dr Oliver said.
“The logic is simply that the economy is currently quite strong with unemployment down and the inflation rate at 5% and still rising.
“So while we’ll see a 0.5% hike in July, the interest rate and inflation rate will slow down such that by the end of this year we’ll only see a cash rate of 2.1% and ultimately a peak of 2.5% by the end of the first half next year.”
Westpac chief economist Bill Evans also forecasts a 50 basis point increase in today’s announcement.
“The 50 basis point increase in the cash rate at the July 5 Board meeting seems highly likely,” Mr Evans said.
“We will be particularly interested in any guidance the Governor may provide about the August meeting, where we expect a third consecutive 50 basis point move prior to a pause in September.”
Westpac’s economic team believes the cash rate could increase to 2.35% by the end of 2022, and 2.60% by early 2023.
Will Australia follow New Zealand's cash rate hikes?
PRD chief economist Dr Asti Mardiasmo suggests the RBA will look to other countries and the effects their rate hikes have had on inflation and house prices to determine their decision.
“The reason for this is FOMO - because a higher cash rate equals less borrowing power, and those buying would like to maximise their borrowing power," Dr Mardiasmo told Savings.com.au.
“That said, if we learn from our neighbour New Zealand, they started their cash rate hike in October 2021, at 25 basis points.
“House prices did decline for a few months, but then increased again when the cash rate was held steady. It wasn’t until they started increasing by 50 basis points, that they saw a sharper and quicker decline in housing prices.
“I wouldn’t be surprised if the RBA learns from New Zealand’s experience. That is, instead of increasing by 25 basis points they increase by 50 basis points for a sharper quicker effect.”
New Zealand's cash rate now sits at 2.00%.
See Also: New Zealand house prices decline markedly, will Australia follow?
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