The Reserve Bank will meet tomorrow to decide the cash rate for August with economists forecasting another 50 basis point lift.
UPDATE: The RBA has announced a 50 basis point increase to the cash rate for August, taking the rate to 1.85%.
Economists across major banks are backing the Reserve Bank to lift the cash rate by another 50 basis points to 1.85% when the RBA board meets Tuesday.
Another 50 basis point increase would mean 175 basis points of tightening has been delivered in just three months amid surging inflation.
This comes as money markets have significantly wound back pricing on the expected peak RBA cash rate to 3% on Monday.
Following May's decision to lift the cash rate for the first time since November 2010, RBA Governor Dr Philip Lowe signalled 25 basis points was the standard amount the RBA moves the cash rate.
"We deviated from that in various times in the past because circumstances required it, but 25 basis points is the standard move," Dr Lowe said.
"We want to signal we're getting back to business as usual, things are normalising and 25 basis points was the right number."
Three consecutive 50 basis point increases may signal otherwise.
Westpac Chief Economist Bill Evans is confident the RBA will lift the cash rate another 50 basis points this month.
"Last week we lifted our forecast for the RBA’s terminal rate in this cycle to 3.35%, up from 2.6%, with the timing for reaching the terminal rate remaining the February Board meeting next year," Mr Evans said.
"The revised profile sees the Board raising the cash rate by a further 0.5% in September to 2.35% - near the Governor’s estimate of neutral which is 'at least 2.5%'."
Mr Evans said to expect the RBA to signal a slower tightening pace after the September meeting.
AMP Chief Economist Shane Oliver said some have interpreted the RBA's belief in the resilience of households for absorbing rate rises as a sign the cash rate will rise above 3%.
"While we agree that the RBA has to sound tough to keep inflation expectations down, which is what it’s been doing lately, it’s unlikely that rates will need to rise that far and if they do it will cause a major problem for the economy," Mr Oliver said.
"While its true that many households are well ahead on their mortgage payments, many are seeing a massive increase in their monthly debt servicing bill.
"On the RBA’s own analysis around 1.3 million households are set to see a 40% or greater increase in their mortgage payments with a 3% rise in interest rates.
"This at a time of falling real wages will have a huge impact on spending in the economy and risk a significant rise in forced property sales.
"Coming at a time when home prices are already falling rapidly due the impact of rising rates on home buyer demand it will only add to home price falls which will weigh further on consumer spending."
Read more: Refinance soon to avoid a mortgage prison, say lending executives
'Weak' risk of increasing above 50 basis points
CommBank Head of Australian Economics Gareth Aird said there is a weak risk that the RBA delivers a bigger rate rise of either 65 or 75 basis points.
"We consider both of these outcomes to be unlikely, but nonetheless the risk should be flagged," Mr Aird said.
"A 65 basis point hike would take the cash rate to a conventional metric of 2.00%. In contrast a 75 basis point rate rise would keep the cash rate on an unconventional metric and it would be a shock to financial markets participants."
Mr Aird said the fact there were no surprises in last week's inflation data is key to expectations the RBA will not raise by more than 50 basis points on Tuesday.
"In addition, the RBA Board meets more frequently than most other central banks, which reduces the need to deliver such a large hike at any given monthly meeting," he said.
"[Although] we must stress that 50 basis points is twice the size of a ‘business as usual’ 25 basis point hike – the economic fraternity is at risk of ‘normalising’ 50bp hikes."
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