Australia’s central bank set to hike interest rates this week

Australia's central bank is all but certain to raise interest rates this week to slow accelerating inflation, which is putting pressure on consumers who are among the most indebted in the world.

All but one of 26 economists surveyed by Bloomberg believe the Reserve Bank of Australia will raise its cash target rate by half a percentage point on Tuesday to 1.35%, a level not seen since May 2019. Market Economics predicts a larger 75 basis-point move.

The RBA is behind its peers, having held rates near historic lows until increases in May and June that lifted its benchmark by 75 basis points to 0.85%. A 50 basis point hike on Tuesday would mark the first time Australia has hiked by that amount at consecutive meetings.

While the country is facing similar inflationary pressures as other economies, its consumers are some of the most indebted globally, with the household debt-to-income ratio at a record high of 187%.

Central banks in the US, UK, Canada and New Zealand have moved much faster to curb inflation while alarming investors who fear that aggressive hikes could cause a recession.

The RBA has to tread carefully to avoid a serious growth downturn, said Diana Mousina, senior economist at AMP Capital Markets.

She believes that the cash rate will peak at 2.6%, compared to the hawkish bets in the money market for 3.2% in December and a high of 3.7% next year.

Australia's $2.1 trillion $1.4 trillion economy seems to be holding up well after the first two rate hikes. Most economists have downgraded growth forecasts, with Nomura Holdings Inc. so far alone in projections of a recession.

There are signs of consumer fatigue, including weekly card spending data from Australia's major banks, which points to a slowdown in June after months of stellar growth. Private consumer surveys indicate a pullback in spending.

Governor Philip Lowe said rates are likely to rise by up to 50 basis points at Tuesday s meeting, while pushing back on suggestions that his board could make an outsized 75 basis-point move.

If Lowe chooses to wrong foot economists and markets, he could raise the benchmark by 40 basis points. It would take the cash rate to 1.25% and return it to its more traditional quarter-percentage point multiples.

Chris Read, the Australian economist for Morgan Stanley, expects to see 50 basis-point increases in July and August, followed by quarter-point hikes through November, taking the cash rate to 2.6%.

He said that there won't be a slowing of jobs and inflation until late this year, keeping 2 H 22 rate hikes on track even as risks grow for 2023.

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