Minutes from the Reserve Bank's last meeting show borrowers may only have narrowly escaped a bigger rate rise and should brace for the chance of a super-sized move in June.
Most economists had expected the RBA to raise rates by 15 basis points at its May meeting, while a few had tipped a 40-basis-point rate hike and a couple expected it to wait until June for its first move.
However, the Reserve Bank caught everyone off-guard by lifting rates by 25 basis points.
It seems that either no move or a 15-basis-point rise were barely even on the agenda at the May 3 meeting.
"Members considered three options for the size of the rate increase at the present meeting: raising the cash rate by 15 basis points, 25 basis points or 40 basis points," the minutes noted.
"Members agreed that raising the cash rate by 15 basis points was not the preferred option given that policy was very stimulatory and that it was highly probable that further rate rises would be required.
"A 15-basis-point increase would also be inconsistent with the historical practice of changing the cash rate in increments of at least 25 basis points.
"However, members agreed that the preferred option was 25 basis points. A move of this size would help signal that the board was now returning to normal operating procedures after the extraordinary period of the pandemic."
The fact that a 40-basis-point rise was seriously considered has many economists speculating that it could happen in June, especially if Wednesday's Wage Price Index numbers are higher than the 2.5 per cent annual growth most economists are currently expecting.
"The mere discussion of a 40-basis-point move means it cannot be ruled out, particularly if, once again, data surprises on the upside," argued CBA's Belinda Allen.
"We think an upward surprise of 1 per cent quarter-on-quarter growth in tomorrow's Wage Price Index (WPI) could be enough to get the RBA over the line for 40 basis points, though if it comes in at our forecast of 0.8 per cent quarter-on-quarter, that prospect will recede," noted ANZ's head of Australian economics David Plank.
While the Reserve Bank generally avoids giving any exact forecasts or guidance on the future path of interest rates, it did reveal the assumptions underpinning its latest economic forecasts.
The RBA's economists assumed the cash rate would reach 1.75 per cent by the end of this year and 2.5 per cent by the end of 2023 in arriving at its forecast that inflation would fall back within the bank's target range of 2-3 per cent by mid-2024.
Those assumptions were derived from a combination of economist forecasts and market pricing.
However, many experts do not expect interest rates to rise that high, including the Commonwealth Bank's economics team.
"Our overall view is that the interest rate will go up to about 1.6 per cent," the bank's chief executive, Matt Comyn, told The Business.
"So, less than many other commentators or even the market is predicting at the moment.
Mr Comyn said his bank had been testing new mortgage applicants to ensure they could meet repayments if mortgage rates rose to at least 5.25 per cent.
The RBA has copped criticism about its previous guidance around interest rates, which some have argued led a portion of borrowers to take on loans based on those expectations of ultra-low interest rates for at least the next couple of years.
But it was keen to point out that it was not the only central bank to publicly forecast that rates would likely not rise before 2024, only to have to raise them this year.
"Members noted that [Sweden's] Sveriges Riksbank had increased its policy rate by 25 basis points, in response to higher-than-expected inflation, having indicated as recently as February that it did not expect to increase its policy rate until at least 2024," the minutes noted.
