Is a 75-basis-point increase on the table after all?

Despite RBA governor Philip Lowe stating that a 75-basis-point hike was never on the table as recently as June this year, one major bank predicts one is forthcoming for Australians.

Phil O’Donaghoe, chief economist for Australia at Deutsche Bank, suggested the country would see a 75-basis-point cash rate hike next month. “We continue to look for the cash rate to rise by 75 basis points in August, and for the cash rate to reach 3.1% by the end of the year,” he said.

Four out of four of Australia’s major banks have placed their bets against that statement, predicting another 50-basis-point increase instead. Westpac recently reaffirmed its position that a half-percentage-point increase was expected for August, adding that a pause in the interest rate hike cycle was unlikely in favor of forecasting a 25-basis-point increase in September – spreading the 75-basis-point hike across the next two months.

Even Lowe, when questioned about the possibility of the cash rate increasing by 0.75% after June, said, “I don’t want to forecast the next meeting, but I suspect it’ll be the same discussion again, 25 or 50 [basis points] again.”

But O’Donaghoe explained why he suspects the RBA may lift rates by 0.75%.

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With inflation already running high and demand pressures in the economy yet to abate, there was a “growing risk” Australians would become accustomed to inflated prices, the Sydney Morning Herald reported. He also believed reports on household sensitivity to rates were overstated, with the RBA’s express priority of preventing inflation from rising out of control.

According to the Australian Bureau of Statistics, the unemployment rate of 3.5% is at its lowest since 1974 and well below the predicted fall from 3.9% to 3.8%. This data has worried more than a few experts about new inflation pressures, RateCity reported. Fewer workers seeking jobs increased the possibility of employers lifting wage rates to draw in new staff, the website explained, and higher wages resulted in businesses pulling up the cost of goods, leading to greater inflationary pressures.

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Still, policy director at the Australian Institute Greg Jericho pointed out that the theory of wage-push inflation did not apply as strongly in Australia, where wages have not kept pace with either inflation or productivity growth over the past years, and where wages evidently did not cause the surge in inflation in Q1 2022.

“From June 2019 to the end of 2021, inflation has increased 5.7% and productivity has grown by 4.5%. And yet rather than wages growth being equal to the sum of those two measures, nominal wages in that period increased just 4.8%, and real wages have fallen 0.8%. Real wages have thus declined, while real labour productivity increased,” Jericho was quoted as saying.