Big bomb to explode on Tuesday for ASX shares: economists

The economy could slow considerably and company earnings could take a painful hit.

It feels like investors, consumers, and businesses have barely had a chance to catch their breath after nine consecutive months of steep interest rate rises.

But brace yourselves because Tuesday will see a tenth rate hike.

That's according to a whopping 93% of economists surveyed this week by comparison site Finder.

The overwhelming majority (86%) thought that the Reserve Bank of Australia would add 25 basis points to the cash rate at its board meeting on Tuesday afternoon.

It's a cruel blow, especially for the many younger Australians who have never experienced such steep rises in their adulthood.

"The rate increases so far have already added around $12,000 per year to the average 30-year mortgage," said Finder head of consumer research Graham Cooke.

"Finder's Consumer Sentiment Tracker shows that 52% of Australians are feeling financial stress due to the increased costs, with younger Australians experiencing the highest amount of worry."

Stressed consumers mean they will spend less, leading to lower earnings for businesses. and pain for ASX shares.

A young couple look upset as they use their phones.

Image source: Getty Images

It hurts, but the RBA doesn't have much choice

Unfortunately, inflation is still unacceptably high and the Reserve Bank's only tool to fight it is to fatten up interest rates.

The big worry is that inflation expectations become entrenched in people's minds. That could cause a price-wage spiral that will be very difficult to get out of.

University of Melbourne economist Matthew Greenwood-Nimmo said the RBA would be doing its utmost to avoid that scenario.

"Higher interest rates will help to manage inflation and keep inflation expectations anchored at appropriate levels."

A separate study of homeowners by Mozo earlier this year showed 36% of mortgage holders could not afford another rate rise on Tuesday.

"It's really shocking to think how many households will be struggling if there are more rate rises," said Mozo personal finance expert Claire Frawley.

"Everyone has already been making big sacrifices when it comes to finding extra cash, now they will need to decide what's next on the chopping block."

Comparing 1990s apples to 2020s oranges

While some older Australians have pointed out that they faced interest rates of 17% in the 1990s, property prices were much lower back then.

"Typical house prices used to be about four times incomes. Now they're more than eight times incomes, and more in Melbourne and Sydney," said Grattan Institute's Brendan Coates and Joey Moloney.

"This has meant that for any given mortgage rate, the share of income taken up by mortgage payments is much, much higher."

There could be some relief coming soon, though.

The majority of economists (55%) reckon that the Reserve Bank will hold the cash rate in its April meeting.

"I expect the Reserve Bank to raise the cash rate in March in its continued effort to contain inflation, however, we are likely nearing the end of this rate rise cycle," said Mortgage Choice economist Anthony Waldron.

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Economy

Man holding graphic houses with dollar signs and graph points surrounding them.
Economy

How much further will house prices fall, according to AMP's chief economist?

There's no good news around house values for the foreseeable future.

Read more »

A businessman pushes a giant percentage sign down, indicating eforts to keep inflation in check
Economy

Inflation jumps back to 4%. Are more interest rate hikes coming?

Another inflation increase has put the RBA back in focus.

Read more »

Red percentage sign in front of a chart.
ASX Share Market News

ASX 200 slips as RBA boosts interest rates to 15-year highs

ASX investors and mortgage holders are now eyeing the highest interest rates in 15 years.

Read more »

Oil spelt out on block cubes with an up and down arrow.
Economy

Oil prices rise again as Middle East uncertainty keeps traders guessing

Oil prices are back on the move.

Read more »

A man stands in overalls and a hardhat with a clipboard in front of stacked black oil drums at an oil industry site.
Economy

Oil prices surge as Trump rejects Iran peace deal. What's next?

Could oil prices be heading for another major move?

Read more »

A man sits at his kitchen table reading the paper and drinking coffee as rain pours on him, while a woman stands with an umbrella over her head in the distant background.
Economy

Australia's recession risk hits 50% as RBA prepares to lift rates

Could further RBA rate hikes push the economy too far?

Read more »

A shocked man sits at his desk looking at his laptop while talking on his mobile phone with declining arrows in the background representing falling ASX 200 shares today
Economy

Could two more RBA rate hikes push Australia into recession?

One economist has issued a warning about our economic outlook.

Read more »

a man in a suit jacked sits uncomfortably with his hands clasped before his face in a job interview situation while sitting across from an interviewer
Economy

Unemployment hits 4.6%. Could the RBA hold off on another rate hike?

The RBA has plenty to consider ahead of next week's meeting.

Read more »