"Interest rate rises are coming every month, there are no gaps to measure if they are working. They should do nothing for three months then look at the data otherwise they will go to far and force a recession" - Bigbobbyg

As reader Bobby has pointed out, with sharp interest rate increases coming every month it feels like there’s no time to measure if they’re working or not. Shouldn’t the RBA take a breather for a few months to see what’s happening to the data? Otherwise, won’t they risk going too far and sparking a recession?

They’re good points, so let’s go through them.

Firstly, the RBA kept the cash rate target at 0.1 per cent from November 2020 until May 2022.

Plenty of economists say it was kept too low for too long. They say the RBA should have started lifting the target last year, so now it’s playing catch-up.

Secondly, the RBA has been spooked by the rapid increase in inflation this year, and it’s trying to reassert some control.

It fears that peoples’ behaviour will change if we start to expect that inflation will be higher in the future, so it’s trying to keep peoples’ expectations in check. That’s why it’s being so assertive.

Thirdly, there’s a definite risk the RBA is moving so quickly that it could do economic damage, because there’s a clear lag effect with rate rises.

When it comes to mortgages, the RBA has even said itself that there are millions of households with fixed-rate mortgages that will roll over onto variable rates around the middle of next year, at which point they will experience a big financial shock with a big jump in interest rates. So, what will happen to consumption then?

Many economists have also noted that the RBA’s rate increases will likely be so high, and so swift, that it may have to start cutting rates again by the end of next year once growth starts to falter and unemployment starts rising.

The RBA knows all of these things.

But it’s arguing that, even though house prices have started falling, and consumer sentiment is deteriorating, households are still spending (for now) and unemployment is still declining (for now).

It thinks the economy is strong enough to withstand these rate rises.