The Reserve Bank of Australia needs to hike the cash rate two more times to bring inflation down to appropriate levels, a major bank has warned.
Inflation sat at 3.8 per cent for the 12 months to December, while unemployment continues to hover near historic lows at 4.1 per cent.
Alongside this, consumer sentiment sank 2.6 per cent in the latest report from Westpac and the Melbourne Institute after the cash rate was hiked last week.
Westpac senior economist Matthew Hassan, who authored the report, said the hike put renewed pressure on personal finances and raised concerns for many about the medium-term prospects for the economy.
Mr Hassan argued Australians were in for a “long fight” to bring inflation down to the RBA’s two to three per cent target band, which would require multiple rate hikes.
“The question is how much of a slowdown do we need to bring inflation from three to 3.5 per cent back to below three per cent,” he told Business Now.
“Our view is that two rate hikes should do the job and that inflation is fundamentally less threatening than it was back in 2022-23.
“But there’ll be different opinions (on inflation) and how much of a slowdown is really dependent on how you’re assessing that inflation threat.”
While Westpac’s report showed a drop in consumer sentiment, the 2.6 per cent fall was markedly lower than the average 3.8 per cent plunge after previous cash rate rises.
Mr Hassan noted consumer sentiment held up “reasonably well” due to the consensus rates were set to rise.
“The key thing this time around is it was widely expected,” he said.
“Most expected rates to move higher this year and there was pretty clear warning from the RBA.”
Money markets had forecast an almost 80 per cent chance rates would be lifted prior to last week’s decision.
Next month’s call is widely expected to be a hold, with money markets forecasting an 85 per cent chance of the cash rate being unchanged.
Another two rate hikes would bring the cash rate back to 4.35 per cent.
The RBA held it at this level for almost a year and a half after hiking rates 13 times following the pandemic.
In addition to February’s fall in consumer sentiment, household spending dropped in December by 0.4 per cent.
This followed rises of one and 1.4 per cent in November and October respectively.
KPMG senior economist Terry Rawnsley said household spending could continue to fall due to the strain on mortgage holders from the rate hike.
“The big question now is how consumers will respond to last week’s interest rate hike,” he said in a statement.
“The hope is that it will prompt households to think more carefully about their discretionary spending, to ease some of the inflationary pressures in the economy and reduce the need for further interest rate increases.
“Time will tell if that’s the case.”