AUSTRALIA'S central bank is relying on powerful consumer demand to help the economy absorb its rapid interest-rate increases, setting aside for the moment the spectre of a broad-based housing downturn.
The Reserve Bank will raise its overnight cash rate target by a half-percentage point to 2.35 per cent at Tuesday's (Sept 6) meeting, all but 2 economists surveyed by Bloomberg predict, in what would be its fourth straight move of that size.
Standard Chartered sees a 40 basis-point hike that would remove an anomaly created during the pandemic when rates were cut to a record-low 0.1 per cent, while Bloomberg Economics see a quarter-point increase.
Australian policymakers, like their global counterparts, are striving to prevent inflation from spiralling out of control. They anticipate the A$10 trillion (S$9.52 trillion) housing market will avoid forced sales, as many mortgage holders made advance repayments and high employment lets them meet their commitments.
"Usually in tightening cycles, the RBA would do some rate hikes and then wait to see what happens," said Diana Mousina, senior economist at AMP Capital Markets. "But they're just not giving themselves any time to watch the data because they're worried that inflation's too high."
Consumer-price growth in the second quarter was 6.1 per cent, double the upper end of the RBA's 2-3 per cent target, and is expected to peak at just under 8 per cent late this year.
RBA governor Philip Lowe will deliver an address on Thursday titled "Inflation and the Monetary Policy Framework."
A combination of pandemic-era stimulus and unemployment of just 3.4 per cent has unleashed a boom in household spending. Retail sales surged 1.3 per cent in July and this together with high export prices is expected to fuel the expansion.
Gross domestic product probably rose 1 per cent in the 3 months through June from the prior quarter, and 3.5 per cent from a year earlier, economists predicted ahead of data Wednesday.
Yet the property market is struggling to absorb the RBA's 1.75 points of hikes in the 4 months since May, when the cash rate stood at 0.1 per cent.
House prices fell in August at the fastest pace since 1983. The concern is the downturn will reverberate through the A$2.2 trillion economy, with the nation's households among the world's most indebted.
RBA rate hikes take about 2 to 3 months to flow through to households, according to Jarden Securities. That suggests consumers are only now feeling the hit from the initial rate rise. Also, roughly a third of mortgages are on fixed terms, further insulating them from tightening.
That helps explain why Australian consumers are still spending heavily, though the momentum is likely to fade in time.
"Considering the lags between rate hikes and households making higher mortgage repayments, we expect retail spending and consumption to begin showing signs of weakness by end-2022," said Carlos Cacho at Jarden.
He predicts households' debt servicing to income ratio will next year hit the highest level since 2008, leading to a "material slowdown in consumption".
RBA policymakers are trying to engineer a soft landing while acknowledging that the path to cooler inflation while maintaining solid growth is a narrow one. A Bloomberg survey showed the median estimate of economists is a 23 per cent chance of recession over the next 12 months.
That's one reason why AMP's Mousina also sees the possibility the RBA might opt for a smaller 40-basis-point hike on Tuesday.
"That would help bring the cash rate back to a more normal level," she said. "It would also indicate that the pace of tightening can slow down because we know in Australia that interest rate hikes tend to be more potent." BLOOMBERG