Interest rate hike won't be last this year

RBA RATE DECISION
The RBA is expected to lift the official cash rate to 1.35 per cent when it meets on Tuesday. -AAP Image

An expected interest rate hike on Tuesday won't be the last before the end of the year, economists say.

The Reserve Bank board is widely tipped to hike the cash rate by 50 basis points to 1.35 per cent.

The RBA expects inflation to peak at seven per cent towards the end of the year rather than the six per cent predicted in May, with unemployment set to remain low.

The central bank wants inflation to return to its target band of two to three per cent, using a series of rate hikes to get there.

Another 50 point hike is expected in August following the release of second quarter inflation data, with smaller rises tipped to follow over the remainder of the year.

Australian National University RBA shadow board chair Timo Henckel said there was little option for the Reserve Bank but to lift rates, due to domestic and global factors.

"The challenges for the global economy are not going away any time soon: commodity shortages, high energy prices, inflation, disrupted global supply chains, the Ukraine war, COVID-19 and natural disasters," Dr Henckel said.

"Most OECD central banks are expected to lift policy rates by substantial amounts in order to curb inflation. In this environment it will be difficult for the RBA not to follow suit."

RBA shadow board member Sarah Hunter said the economic outlook was positive, with retail spending up and business and government activity strengthening.

"It is appropriate for the RBA to continue with further policy rate normalisation," she said.

"Moving into 2023, it is likely to become appropriate for the RBA to slow or even pause interest rate rises.

"The full impact of the monetary tightening implemented in 2022 will not be known until well into 2023, and the board will need to monitor the data carefully to ensure that they haven't gone too far, too fast."

CommSec chief economist Craig James said there appeared to be "no signs of borrower angst" in May in response to higher interest rates.

One of the surprising elements of the economy is the construction industry, with dwelling approvals rising 9.9 per cent month on month, on the back of a 32 per cent rise in apartment approvals.

But detached residential approvals were 2.7 per cent lower in the month, according to the Australian Bureau of Statistics.

Housing Industry Association senior economist Nicholas Ward noted house approvals were 14.7 per cent higher than the same three months in 2019.

"Renovations activity also remains elevated. While the value of renovations approved fell by 1.8 per cent in the three months to May 2022, it is 38.9 per cent higher than the same three months in 2019."

As well, the ABS reported the value of new loan commitments in May rose 1.7 per cent for housing and 5.1 per cent for personal fixed-term loans.