Interest rates are almost certain to increase on Tuesday and the official cash rate is likely to reach 3.85 per cent within the next six months despite increasing evidence that growth is weakening, according to members of the RBA Shadow Board.
The Shadow Board, comprising 10 leading economists, thinks there is an 81 per cent probability that interest rates need to rise and expects the central bank to announce a 0.25 of a percentage point increase to 3.6 per cent.
Ominously for borrowers, the Shadow Board tips more rate hikes will be needed as the Reserve Bank of Australia acts to dampen inflation, with the chances of the official cash rate reaching 3.85 per cent in the next six months put at 84 per cent.
Markets are even more hawkish, expecting the cash rate will reach 4.1 per cent in August and stay there until early next year.
The broad consensus that rates will rise on Tuesday has emerged despite mounting evidence that the nine interest rate hikes made since May last year are bearing down increasingly heavily on households and the economy.
The annual rate of growth slowed to 2.7 per cent in the December quarter, the unemployment rate climbed to 3.7 per cent in January, building approvals have collapsed and house prices are plunging.
Although wages are increasing, data show they grew by a moderate 3.3 per cent late last year, far below the pace of inflation. The result is that real wages are shrinking at their fastest rate in decades.
But JB Were chief investment officer Sally Auld said the scale of the inflation problem was significant.
"Inflation is too high. It is well above target," Ms Auld said, predicting that the central bank will lift the cash rate this month before pausing in April as it assesses the impact of tighter monetary policy.
The economist said that although a large and growing number of households were coming under intense financial pressure there were also many who were continuing to spend strongly, particularly on services.
ANU economist Warwick McKibbin, who is a member of the RBA Shadow board and served on the RBA Board, has indicated that interest rates may need to go to 4.1 per cent or even reach 4.35 per cent in order to tame inflation.
Australian Bureau of Statistics showed that the pace of inflation slowed in January but still reached an annual rate of 7.4 per cent - well above the RBA's 2 to 3 per cent target band. While higher rents and mortgage repayments contributed to the increase, so did increased spending on clothes, department stores, travel and going out.
Greens treasury spokesman Nick McKim slammed the RBA, accusing it of being "stuck in the past and in denial of reality".
Senator McKim told parliament successive interest rate increases were "smashing renters and mortgage holders" and called on the federal government to act by freezing rents, making childcare free, increasing income support and extending Medicare to include dental treatment.
"The RBA is raising interest rates to squash a non-existent wage-price spiral," the Greens senator said. "Poorer Australians, who have done nothing to create the problem, are paying the price."
Centre for Independent Studies chief economist Peter Tulip, who is also a member of the RBA Shadow Board, is also critical of the central bank but from a different angle.
Mr Tulip said the central bank's current approach depended on "wishful thinking" that wage growth would remain moderate and inflation expectations would continue to be well anchored.
"They want to avoid an increase in unemployment," he said. "But the choice is between a small increase in unemployment now...or the risk of a much larger increase later if higher inflation becomes entrenched."
RBA Shadow Board chair Timo Henckel said the shadow board's assessment was that in a year's time interest rates will have to be higher than they are now and that was likely to still be the case three years from now, putting the odds of a cash rate above 3.35 per cent in early 2026 at 53 per cent.
Dr Henckel warned that calls by critics for the Reserve Bank to pause or cut rates could actually backfire and make it more likely that the central bank could hike.
"If the RBA suddenly takes a bit of a doveish turn in the face of a lot of criticism, that is going to hurt its credibility as an independent central bank," he said.