The Reserve Bank will raise interest rates amid cost of living pressures, but by how much?
Australians must also prepare for the impending rise in electricity prices due to soaring fossil fuel costs. Average gasoline prices for the last week of May reached $2 per liter as higher oil prices absorbed the 22 cents per liter tax relief on fuel, which is scheduled to end in September.
Amid a gas supply crisis, freezing temperatures in Sydney and Melbourne caused wholesale prices to rise more than 50 times normal levels last week, forcing the Australian market operator to energy to intervene and set a price ceiling. Federal and state governments will meet this week to address the supply shortage.
The RBA considered a 0.4 percentage point hike in May, but opted for a smaller increase instead. Since the May meeting, wage data has come in weaker than expected, but business contacts have told the RBA that wage growth is accelerating, and economic data for the March quarter showed that growth of GDP was strong.
Oliver said inflationary pressures continue to mount, “particularly with a rebound in gasoline prices and reports of soaring electricity prices and rents.”
“As a result, the RBA’s concerns about the psychology of rising inflation are likely to have growing case for accelerating the pace of tightening in June to bring inflation under control – just as we’ve seen it in New Zealand, Canada and probably soon in the United States,” he said.
“We therefore expect a rise of 0.4% bringing the cash rate to 0.75%. There is a risk that he could even opt for a 0.5% hike”.
Across NSW the average new home loan has reached $800,000, while in Victoria it is now $650,000, meaning even a small rise in interest rates will cause difficulties financial resources to overburdened borrowers.
Oliver said the recent slowdown in the housing market, with house prices falling 0.1% in May, was good news for the RBA as it showed the central bank’s measures were gaining ground.
UBS economists expect the RBA to hike the cash rate by 0.25 percentage points, but say there is a chance of a 0.4 percentage point hike.
They said inflation, which UBS expects to rise further, the upcoming minimum wage ruling due from the Fair Work Commission by mid-June and rapid interest rate movements in other central banks will add pressure on the RBA.
“The RBA will maintain an urgency to increase in the coming months,” UBS economists said.
“We expect the RBA to reiterate a ‘soft forward guidance’, it is ‘committed to doing what is necessary to ensure that inflation in Australia returns to target over time’. This will require a further hike interest rates”.