Australian Interest Rates May Rise Again as Inflation Persists, Analysts Warn

Borrowers in Australia may face additional interest rate hikes as inflation proves more stubborn than anticipated, according to analysis from Macquarie Group. The investment bank suggests that comments from Reserve Bank of Australia (RBA) officials indicate a hawkish stance, potentially leading to further rate increases.

The RBA has been striving to bring inflation back within its target range of 2 to 3 percent. However, elevated oil prices, insurance costs, and rents have contributed to persistent price pressures. Macquarie strategists noted that the RBA has not signaled that current economic slowdowns are sufficient to return inflation sustainably to its target.

Money markets are reflecting this sentiment, with approximately a 76 percent chance currently priced in for an RBA interest rate rise this month. The likelihood of a fifth hike by March of next year is estimated at over 90 percent.

For homeowners with a $600,000 mortgage and 30 years remaining, two additional quarter-point increases, if fully passed on by banks, could add approximately $195 per month to repayments, amounting to roughly $2,340 annually. This would be in addition to the approximately $284 monthly increase already experienced from the RBA's three rate hikes this year.

Shane Oliver, Chief Economist at AMP, believes that mortgage holders should prepare for a potential rate increase. He stated that the RBA appears to have seen enough negative inflation news to warrant a hike this month. Oliver pointed out that while home prices have seen a slight increase year-on-year, the primary concern for the RBA remains high inflation.

RBA assistant governor Sarah Hunter emphasized that "inflation is top priority right now," and deputy governor Andrew Hauser echoed this sentiment, noting that the public is "furious about inflation…(and) want us to do our job and bring inflation down." Despite rising risks of recession due to surging oil prices and a negative wealth effect from falling home prices, inflation is presented as the more pressing issue for the RBA.

Oliver suggested that delaying a rate hike until November risks further damaging the RBA's credibility in its commitment to controlling inflation. He estimated the odds of a rate hike this month at 75 percent, though he acknowledged that global developments or weak employment reports could alter this outlook. He also cautioned that a second hike in November might be excessive, potentially triggering a housing market crash, higher unemployment, and a deep recession. The probability of a second hike is considered around 50/50, with a third hike deemed likely to be an overreaction. Oliver views the current market pricing of nearly three hikes by October next year as an overreaction to rising oil prices.