The Reserve Bank of Australia could deliver multiple rate hikes to try and stop a “runaway train” of entrenched inflation, economists have warned ahead of tomorrow’s meeting.
Swinburne economist Professor Abbas Valadkhani said he expected the cash rate to lift to 4.35 per cent from 4.1 per cent, as the RBA moves to strangle fresh inflation pressures from the Iran War and global energy shock.
Last week, the Australian Bureau of Statistics revealed annual headline inflation had jumped to 4.6 per cent, well above the central bank’s target band of 2-3 per cent.
Mr Valadkhani warned Aussie households could be hit with “multiple” hikes going forward if inflation becomes “entrenched”.
“If inflation is entrenched, we are in trouble,” he said.
“If the conflict in the Strait of Hormuz and the Persian Gulf continues and if the price of oil stays above US$100 for a long period of time, inflation will be entrenched.
“Then, we are not dealing with energy driven inflation, it will spread to wages over time, it will spread to services inflation.
“That’s when we will be in the biggest dilemma … it’s very challenging to bring it down, unless we have multiple rate rises.”
In that scenario, he said Australia could enter a recession.
“Once inflation gets entrenched, it’s like a runaway train,” he said.
“It’s very difficult to bring it down with one hike, or two hikes, or three hikes … they (the RBA) hope that the conflict in the Middle East is coming to an end very soon, otherwise we will be all in big trouble.”
The RBA has lifted rates twice this year and a hike tomorrow would mark its third hike, wiping out the three cuts it delivered across 2025.
Ray White economist Nerida Consibee also expects a rate hike tomorrow and more to come this year.
“The big uncertainty is around how much increased fuel costs are crushing the rest of the economy,” she said.
“That’s the bit that is really hard to work out because inflation at the moment is really being driven by things that are not easily controlled by monetary policy (interest rate increases or decreases) but at the same time the RBA can’t sit on their hands and do nothing.”
The big banks also expect mortgage holders to be slugged tomorrow.
NAB CEO Andrew Irvine, speaking on a media call on Monday morning, said the RBA had a “devilishly difficult job ahead of them”.
“Inflation is running too high and we have to get it under control,” he said.
“Inflation is bad for households and businesses.”
Westpac chief economist Luci Ellis, meanwhile, said a hike tomorrow was “locked in” and reiterated her “base case” of “two further hikes after May, in June and August”.
“The RBA’s experience last year, when underlying inflation popped back up almost immediately after it cut rates, will have nudged some within the RBA to the idea that the cash rate needs to be higher than its previous peak to really get inflation under control,” she said.
The forecasts come as a new consumer sentiment survey from Finder reveals another hike could push 100,000 mortgage holders into default.
The survey of 1019 people in April found 3 per cent, extrapolated out to 100,000 borrowers, said they were already “on the brink” and could only absorb one more increase.
“Many Australians are walking a financial tightrope and it wouldn’t take much to tip them over,” Finder money and home loans expert Richard Whitten said.
“This research reveals how little buffer many households have left.
“When you consider how persistently high the cost of living has been over many years, it’s no surprise so many borrowers are nearing their limit again.”