The consensus among most economists for this month’s cash rate hike sits at 50 basis points. 

If the RBA hikes by 50 basis points, the cash rate will rise to 2.35% - the highest level seen since December 2014. 

Another 50 basis point increase would mean 225 basis points of tightening has been delivered in just four months amid surging inflation.

Westpac Chief Economist Bill Evans is confident the RBA will raise the cash rate by a further 50 basis points.   

“Raising the cash rate by 50 basis points will move the cash rate into the 'neutral zone',” Mr Evans said.

A neutral cash rate target refers to one that is neither stimulatory for the economy nor contractionary. 

“Having quickly moved policy into that neutral zone - 225 basis points in four months or five meetings - we expect the Board will decide to slow the pace of increases to 25 basis points from the October meeting," Mr Evans said.

“This second stage of the tightening process, with consecutive 25 basis point increments, is expected to extend out to February next year with the rate peaking at 3.35%.”

Mr Evans said holding the cash rate at 3.35% through 2023 is crucial to help bring inflation down close to the underlying 3% target. 

AMP Chief Economist Shane Oliver said while a 50 basis point increase is probable, a 25 basis point hike could also be on the cards.

“Given the lags involved in how monetary policy impacts the economy, many households have not seen the full impact of the rate hikes so far and the fixed rate cliff is yet to impact mostly next year,” Mr Oliver said.

“It makes sense for the RBA to slow the pace of tightening to give time to assess the impact of rate hikes so far.

“Moving by 40 basis points might be a good compromise, and return the cash rate to a more 'normal' number.

“We still see the peak in the cash rate being 2.6% later this year or early next.”

See Also: When will interest rate rises stop?

RBA doesn’t need to tighten as much as the US Fed 

CommBank Head of Australian Economics Gareth Aird said although the Board could justify raising the cash rate by 25 or 40 basis points, this won’t likely happen.

“We expect the RBA to raise the cash rate by another 50 basis points next week, to 2.35%,” Mr Aird said.

“We anticipate this will be the last 50 basis point rate hike by the RBA. 

“From there, we expect one further rate hike of 25 basis points [in October] which would take the cash rate to 2.60%.”

Mr Aird warns any further rate hikes would likely cause a recession, and said Australia's Reserve Bank Board should not compare Australia’s economy with that of the US.

“On the one hand, the board may feel that the US Federal Reserve will do some of the heavy lifting on the inflation front by putting downward pressure on US demand and in turn aggregate global demand and tradables inflation,” he said.

“But on the other hand, [Fed Chair Jerome] Powell’s rhetoric may mean the board feels a greater sense of urgency to bring down inflation.

"This would raise the risk that the RBA continues for a little longer with aggressive 50 basis point rate hikes, (but) we do not believe the RBA needs to go down this path.

“The Australian economy is not in the same place as the US economy presently.”

Additionally, Mr Aird believes the Board is now “flying blind” in terms of the economic impact of the interest rate hikes. 

“We think that provided the RBA pauses for at least a few months in their tightening cycle when the cash rate is 2.60% or 2.85%, the data will indicate that there is no need to continue to take the policy rate higher,” he said.

“Indeed, taking the cash rate higher would likely generate a hard landing in the economy.”

See Also: What is stagflation?

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