Another double rate hike is coming, but the Reserve Bank may soon hit the brakes again

Prepare for another hit.

When Reserve Bank heavyweights gather around the board table in Martin Place tomorrow, the question will not be whether to raise rates, but how much.

The consensus is that we will be hit with a fourth consecutive double increase, although some forecasters, such as Saul Eslake, believe that the RBA this month will begin to moderate the increases, reducing them to increases of 0.25 percentage points.

Having come to the rate-hike party too late, the Reserve Bank is under increasing pressure from outside forces to maintain momentum, especially since US Federal Reserve chief Jerome Powell declared a little over a week ago its intention to continue the fight against inflation.

Since that speech, already skittish financial markets have turned around.

Just when they thought the worst might be behind them, they were forced to reassess their predictions about the level at which interest rates would peak, with much higher forecasts sending stocks and bonds lower.

Wall Street last week lost about 7 percent, while our market fell about 4 percent with a couple of days of particularly intense selling.

At just the right time, the decline in our housing market accelerated last month, falling at the fastest pace in 39 years. It now stretches across the country with the regions to the south and all capitals except Darwin in decline.

Asset markets are falling globally and central banks, led by the US Federal Reserve, don’t seem too concerned.

That change in attitude is significant. Having spent the past 20 years jumping to the defense of financial and property markets, cutting rates at the slightest hint of trouble, the world’s largest central bank has suddenly decided to play hardball with a steely determination to stamp out inflation. first and worry about recessions later. .

If it’s going too hard it’s too early to tell. But his actions will have repercussions globally, even here.

How far will the RBA hikes go?

Another double increase tomorrow will take the official cash rate to 2.35 percent. From a starting point a touch above zero in May, the pace of rate hikes has been incredible, unlike anything we have seen in decades.

If you believe the money markets, the RBA will quickly move towards 4 percent, although the speed at which the money markets change their forecasts is impressive.

Sensible commentators, including Eslake and Gareth Aird of Commonwealth Bank, believe we have seen the worst, that while further rate hikes are on the way, the pace will slow significantly.

There is a simple explanation for their way of thinking. It takes a long time for the full effect of changes in interest rates to manifest. This is known as the delayed effect.

While we have seen a drop in house prices, because banks are no longer prepared to lend the kind of money they once were, there have been few early signs of a slowdown in household spending.

One reason is that it takes a while for banks to push rate changes to their customers. Another is that it takes some time before consumers start to pull back on their spending. The tide initially turns gently before receding at a faster rate.

There are other factors too. A host of new entrants to the housing market have taken out fixed-rate mortgages, which roll over for the next 18 months, so the impact of higher interest rates has effectively been delayed.

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