Home owners are being told to brace for even higher mortgage bills in 2023 as the Reserve Bank’s inflation fight approaches a second year.

The RBA unveiled an eighth interest rate hike at its final meeting of 2022 on Tuesday, lifting its target by another 0.25 percentage points to a decade high of 3.1 per cent.

It capped off an unprecedented run of rate rises that’s seen more than $800 added to typical monthly mortgage bills for millions of households.

As RBA boss Philip Lowe warns further increases will be needed to bring inflation down from three-decade highs, economists say families must now brace for at least another $200 in additional mortgage pain.

“We will see more people struggling and having to reach out to their lenders,” KPMG senior economist Sarah Hunter told The New Daily.

Moving forward, economists said the trajectory for interest rates will be determined by how tightly consumers hold onto their purse strings over Christmas, with expectations of a slowdown in the New Year.

Two paths for interest rates in 2023

When the RBA began increasing interest rates in May, rates were nailed to the floor at a record low 0.1 per cent. As things stand, markets think rates will hit 3.6 per cent by late 2023 – which will be the sharpest rise since the 1990s.

Others think higher: ANZ thinks rates will hit 3.8 per cent by May 2023.

“Key numbers such as CPI [inflation] and wages will leave the RBA with little option,” head of ANZ economics David Plank wrote on Tuesday.

But how high rates rise, and when, remains uncertain. Economists said the RBA is balancing a need to push inflation down by reducing the demand for goods and services with the risk of triggering a recession.

And in determining how to achieve that, economic data on the pace of price rises and spending growth over Christmas will be crucial.

Dr Hunter said that if spending slows considerably after the holidays the RBA will be more inclined to pause rate hikes, because inflation should begin to ease as global supply chain pressures start being resolved.

She pointed to declining fuel prices, a slated peak and easing of food prices, and declining building costs as key factors driving inflation lower.

“As long as we don’t see a worsening of the conflict in Ukraine or anything else happening like that, you can see inflation going from high 7 per cent down into the 4-5 per cent area,” Dr Hunter said.

But, on the flip side, if the recent run of rate hikes fails to cool demand for goods and services and wages growth begins chasing high inflation, then the RBA will likely push rates even higher than currently forecast.

Either way, the good news is economists think the worst of the rate hike cycle is behind us, with further hikes slated to be more touch and go.

“We’re certainly closer to the end than the start,” BIS Oxford senior economist Sean Langcake said. “My forecast is a top of 3.6 per cent.”

Downturn risks surface

Heading into 2023, economists say the big risk for Australia’s economy is that the mortgage bill squeeze goes too far and triggers a recession.

Tuesday’s rate hike was somewhat of a milestone because it marked 3 percentage points of increases since May – which is a legal buffer that banks use to calculate the ability to repay their home loan if rates rise.

In other words, those who purchased property when rates were nailed to the floor were still able to afford paying up to 3 per cent more interest.

Moving beyond that level raises the risk that more households could be put in financial strife as rates (and mortgage bills) keep rising in 2023.

Because the major banks are saying many customers have got big savings buffers in place, there aren’t expected to be any broad-based financial stability risks like those that triggered the 2008 financial crisis.

But Dr Hunter and Mr Langcake agreed the larger concern will be how the millions of households who fixed their loans during the pandemic will respond to their rates reverting to higher levels over the course of 2023.

CoreLogic head of research Eliza Owens said on Tuesday that many of these home owners could experience “sticker shock” as their rates go from below 2 per cent to higher than 4.5 per cent almost overnight.

That could accelerate the spending slowdown the RBA is trying to inflict on households and, potentially, push it further than has been intended.

“The challenge is what happens with spending,” Mr Langcake said.

“It has to be a first order concern for the RBA, and I think it is in their communications, they talk about a path to a soft landing narrowing.”