Aggressive Interest Rate Hikes to Test Australian Consumer Might

Swati Pandey, Bloomberg News

Houses under construction in the Denham Court suburb of Sydney, Australia, on Tuesday, May 3, 2022. One of the developed world’s last remaining doves turned hawkish as Australia’s central bank rocked markets with a bigger-than-expected interest-rate hike in the middle of an election campaign. , Bloomberg

(Bloomberg) -- Australia’s central bank is all-but-certain to raise interest rates this week to slow accelerating inflation, piling pressure on consumers who are among the most indebted in the world.

All but one of 26 economists surveyed by Bloomberg expect the Reserve Bank of Australia to raise its cash target rate by half a percentage point on Tuesday to 1.35% -- a level not seen since May 2019. Market Economics is forecasting 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 a total 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, driven by surging prices of gasoline, electricity and food, its consumers are among the most indebted globally, with the household debt-to-income ratio at a record high 187%.

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

The RBA “has to tread carefully not to crush the consumer if it wants to avoid a serious growth downturn,” said Diana Mousina, senior economist at AMP Capital Markets.

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

Australia’s A$2.1 trillion ($1.4 trillion) economy appears to be holding up well so far after the first two rate hikes. Most economists have downgraded growth forecasts, with Nomura Holdings Inc. so far alone in projecting a recession.

Yet there are some 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 also indicate a pull-back in spending.

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

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

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

“Broader slowing of jobs and inflation won’t be felt until late this year, keeping 2H22 rate hikes on track, even as risks grow for 2023,” he said.