The Reserve Bank of Australia (RBA) announced a 25 basis point increase on Tuesday, lifting interest rates to 3.35 per cent – their highest level since September 2012.

The bank opted for another cash rate hike, its ninth in a row, after concerning inflation data revealed last month that annual inflation had climbed to its highest level since 1990.

Namely, on 25 January, the Australian Bureau of Statistics (ABS) reported that the consumer price index (CPI) had increased by 7.8 per cent over the year, exceeding recent forecasts.

At the time, the CBA evaluated that these “red hot” inflation figures would be the “smoking gun” for another 25 bp hike in February.

“The RBA maintained a hiking bias at the December Board meeting. And we expect them to deliver on that bias at the February Board meeting. More specifically, we maintain our forecast that they will raise the cash rate by 25 bps to 3.35 per cent,” economist Gareth Aird said at the time.

Mr Aird has since floated the idea of a 40 bp hike, but late last week he maintained that there’s a 65 per cent probability that the increase would equal 25 bps.

Commenting on the RBA’s first rate hike of the year, Anneke Thompson, chief economist at CreditorWatch, said the bank clearly wants to see some sustained evidence of a cooling economy before pausing any further cash rate increases.

“What the RBA does next will depend heavily on January’s retail trade result,” Ms Thompson said.

“Inflation also appears to be moderating, and we should see further drops in the rate of price growth as data is now being measured off 2022 figures, when price rises had already kicked in,” she continued.

“Another factor that will be key to the RBA board’s decision making is business confidence and conditions.”

Overall, Ms Thompson assessed that it appears the RBA’s efforts to slow the economy and cool inflation are working. But how quickly and deeply this cooling is felt by businesses will be key to determining what happens next to the cash rate.

Prior to the RBA’s meeting, AMP’s Shane Oliver said the current environment doesn’t leave the bank with too many options.

“Underlying inflation surprised on the upside again in the December quarter and retail sales have remained solid so combined these are likely to tip the RBA over into another rate hike,” he said.

Also adding to the swirl of predictions ahead of the meeting, T. Rowe’s Scott Solomon said the RBA likely has room for two more interest rate hikes before hitting pause.

“The RBA likely hike at their first meeting in 2023, maybe even once more after that before pausing the seemingly never-ending string of rate hikes,” the associate portfolio manager said. 

“What we are confident of is the terminal rate will be much lower than in the US where the Fed will pause somewhere around 5 per cent,” he added.

Last week, the International Monetary Fund (IMF) suggested that Australia’s macroeconomic policies should continue to tighten in the near term.

“The RBA should continue raising interest rates, with the pace remaining data-dependent. Near-term fiscal restraint will help support monetary policy in holding back excess demand,” it said.

“Near-term fiscal restraint will help support monetary policy in holding back excess demand. Medium-term fiscal policy should ensure credible consolidation amid structural spending pressures, and tax reforms should help mobilise revenues, strengthen economic efficiency, and improve equity.”

The IMF believes that monetary policy will continue to tighten further through mid-2023.

- IFA