RBA rate hike preview: Rates to peak at 2.6% by year end but over-tightening likely

The Reserve Bank is seen sticking to its plan of doing "what is necessary" to return inflation to target with another widely expected 50-basis point hike, taking the cash rate to 2.35% on Tuesday.

More mortgage and property pain

National house prices have fallen -3.5% since April peaks, the fastest pace of decline since the 1980s, according to CoreLogic.

“As borrowing power is eroded by higher interest rates, and rising household expenses due to inflation, it’s reasonable to expect a further loss of momentum in housing demand,” warned Corelogic's Research Director, Tim Lawless.

"Even the best case interest rate scenario indicates that variable mortgage rates will roughly double from their current level," said CoreLogic's August market update.

"For a household with a $750,000 mortgage, a cash rate of 2.5% implies a variable mortgage rate for a new buyer of 4.81%, adding around $1,011 per month to mortgage repayments."

September policy expectations

Shane Oliver, head of investment strategy and economics and chief economist at AMP, said there is a "strong case" for the RBA to slow the pace of tightening.

This included "the big hit from falling real wages and the increasing weakness in leading indicators notably for consumer confidence and housing."

Still, "RBA is probably likely to give more weight to the strong data seen since its last meeting and hike by another 0.5%."

The strong data included unemployment falling to an almost 50-year low of 3.4%, strong retail sales growth in July and various indicators pointing to a further pick up in wage growth.

"We still see the peak in the cash rate being 2.6% later this year or early next but given the ongoing strength in jobs and spending data there is an increasing risk that the RBA will tighten beyond this," warned Oliver.

Investors will get further cues for 'data driven' central banks following Australian GDP data on Wednesday plus Governor Lowe's speech on Thursday.

ASX outlook

"Shares remain at high risk of further falls in the months ahead as central banks continue to tighten to combat high inflation, uncertainty about recession remains high and geopolitical risks continue," Oliver said.

As far as Tuesday is concerned, the market has typically welcome a hike that's in-line with expectations. Previous ASX 200 performance on the day of RBA rate decisions:

• 3 May -0.42% (larger-than-expected)

• 7 June -1.53% (larger-than-expected)

• 5 Jul +0.25% (in-line)

• 2 Aug +0.07% (in-line)