RBA interest rate hike could happen as early as May before federal election

There’s a chance the RBA could raise up interest rates next week at a higher amount than initially predicted in what could be more pain for mortgage holders.

There’s a chance that the Reserve Bank of Australia (RBA) could raise interest rates as soon as next week, experts have warned.

What’s more, experts also believe the first rate rise will be bigger than anticipated, and will likely be followed by another one straight afterward.

Many economists had already earmarked June as the logical time when the cash rate would rise, but with the election looming, some have brought forward their estimate to May. The RBA will next meet to discuss rates on Tuesday, May 3.

“It’s now a very close call as to whether the first hike will be in May or June,” AMP’s chief economist Shane Oliver said on Friday.

It is currently less than four weeks away until the election on May 21.

Mr Oliver said although the RBA would “prefer” not to lift the rates until the election was over, rampant inflation might force their hand.

“The RBA will prefer to avoid hiking in the election campaign and wants to see March quarter wages data due on 18th May before moving,” he wrote.

But this Wednesday, Australia’s central bank will release inflation data for the March quarter which “will likely further pressure the RBA to start raising rates”, Mr Oliver warned, because “business surveys and another numerous anecdotes of price rises point to surge in inflation in the March quarter”.

The consumer price index (CPI) is expected to be up 1.7 per cent compared to the last quarter — a level way above what the RBA had hoped for, at 0.7 or 0.8 per cent.

Mr Oliver said: “The likely further blowout in Australian inflation means that Australia is now starting to face the same risk as in various other countries that inflation expectations will get out of control locking in higher than target inflation, making it even harder to get inflation back down again.

“As such if inflation comes in around our forecasts there will be a strong case for the RBA to hike in May.”

Were that to happen, it wouldn’t be the first time the rates rose right before an election.

In 2007, about two weeks before Labor’s Kevin Rudd won the federal election, the RBA raised rates amid mounting pressure from a resources boom and large government spending spres.

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Interest rates in Australia reached an all time high of 17.50 per cent in January 1990. Since then, they have averaged 3.93 per cent.

The last time the RBA hiked up rates was in 2010.

The official cash rate has been at a record low of 0.1 per cent since November 2020 in response to the Covid-19 pandemic but it is largely expected to jump by 1 per cent by the end of this year and hit 1.25 per cent next year.

However, now one of Westpac’s economists has revised those figures and thinks it will be double that amount.

The bank’s chief economist Bill Evans revealed on Friday that mortgage holders should be prepared for a double rate rise when the rate hike comes.

He expects the RBA to bump up the official cash rate from its current 0.1 per cent to 0.5 per cent after confirming of the increasing state of inflation in the country.

“We are forecasting a substantial lift in annual global inflation for the March quarter to 3.4 per cent,” Mr Evans said.

“On the basis of those forecasts, we expect the RBA will decide to lift the cash rate by 40 basis points at its board meeting on June 7.”

He added that there is also a “possibility” that the Reserve bank might be a bit more “cautious” by lifting the rate initially by 25 basis points in June, followed by 40 points in July.

It follows after other countries like the US, Canada and New Zealand have been forced to hike their rates in an “aggressive” way as inflation runs amok.

Minutes from an RBA meeting from last week confirmed that the bank is gearing up for the start of rate hikes with it noting that higher inflation and wages growth “have brought forward the likely timing of the first increase in interest rates”.

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