Aussies face more pain

RBA likely to raise rates

MORTGAGE rates are expected to rise for the 10th time in a row after the Reserve Bank board meets on Tuesday and the big four banks all expect more rises to come as the RBA tries to tame inflation.

The cash rate is 3.35 per cent and the banks expect the RBA to increase that by 25 basis points on Tuesday to 3.6 per cent – the highest since September 2012.

AMP Capital’s chief economist Shane Oliver agreed that all the indications were for a rate rise this week.

“Commentary from the RBA has been quite bleak,” he said. “The difference of view (among financial experts) seems to be around how much further interest rates go.”

Forcing the RBA’s hand is the inflation rate, which reached a three-decade high of 7.8 per cent in December, well above the target rate of between 2 and 3 per cent.

“High inflation makes life difficult for people and damages the functioning of the economy,” RBA Governor Phillip Lowe said after the February rise.

“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later. The board is seeking to return inflation to the 2-3 per cent range while keeping the economy on an even keel, but the path to achieving a soft landing remains a narrow one.”

Treasurer Jim Chalmers, who has no say over the RBA board’s decision, last week said there were signs inflation was beginning to ease.

“I’m confident that we can get through this and I’m confident that the worst of inflation is behind us, rather than ahead of us,” Mr Chalmers said.

But he also acknowledged households were hurting.

“Interest rates are biting. Higher inflation has been biting in our economy. And we’re not immune from global conditions either,” he said.

Unfortunately experts agree that more rises are coming, with Westpac, ANZ and NAB predicting rates will reach 4.1 per cent by May, with 25bp raises in March, April and May. That would mean the highest cash rate in Australia in 11 years.

The Commonwealth Bank expects two 25bp increases, to 3.85 per cent in April.

AMP Capital’s Mr Oliver said the risk of recession was real if the Reserve Bank continues to tighten.

“The money market is close to predicting four more hikes and economists are predicting three more hikes,” he said.

“I suspect that would probably knock the economy into recession.”

He said he hoped the RBA would pause its tightening cycle for a few months to allow the impact of the rises to trickle down.

“You can raise interest rates and nothing happens and you do it again and nothing happens,” he said. “It takes a while for you to work out your bank account isn’t looking as good as it used to, and then adjust spending.”