Updated 16 June to include economists upgraded forecasts.

When the RBA started one of the most aggressive rate hiking patterns more than 30 years, no one expected the cash rate to peak over 4%. Yet, here we are. 

The RBA has delivered a whopping 400 basis points' worth of increases to interest rates since May 2022, taking the cash rate to 4.10% in June 2023.

And it’s not over just yet. 

Emphasis on high inflation, high wages growth yet poor productivity in the labour market, and developments in the global economy continues to fuel the RBA’s reasoning for upping the cash rate.

Monthly annualised inflation currently sits at 6.8% in April, well above the RBA’s target band of 2-3%, which is expected to be reached in mid-2025. 

In the June post-meeting statement, RBA Governor Dr Philip Lowe detailed inflation in Australia has passed its peak, but is still too high.

“This further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe,” Dr Lowe said. 

Freedom of Information requests put forth to the RBA on 11 May revealed internal modelling from March showed the cash rate would need to be 4.80% if underlying inflation were to hit 2.5% by 2025. 

This relies on a non-inflationary level of unemployment hitting 4.5%.

According to the modelling, the RBA would raise the cash rate by 25 basis points each month through September to reach the desired target of 4.80%

The analysis did not anticipate the RBA board deciding to pause the cash rate in April at 3.60%. 

Given the RBA seems to have more fuel left in the tank, major bank economists have upped their interest rate predictions with NAB the most hawkish of them all.

NAB - two more rate hikes to come

NAB is now predicting the official cash rate to reach 4.60% by August, following altered expectations on growth and inflation.

The major bank had previously increased its rate call to 4.35% following the RBA’s June decision, however has now tentatively added an additional 25 basis point increase.

NAB Chief Economist Alan Oster and his team of senior analysts have pencilled in 0.25% increases for July and August, although the timing remains uncertain.

“While inflation has clearly peaked, and we (like the RBA) see inflation returning to the band by 2025, the extended period of inflation above target amidst a tight labour market poses the risk of stronger wage and price expectations becoming imbedded,” NAB economists said.

“Taking rates to 4.6% will weigh more heavily on growth and we have revised down our expectations for growth over 2023 to just 0.5% and pulled back expectations for 2024 to around 0.9%. 

“We continue to expect the cash rate to normalise to a more neutral rate of around 3% with rate cuts likely to commence in quarter-two 2024.”

CommBank - one final 25 basis point push

Prior to 15 June, CommBank Chief Economist Gareth Aird expected one final 25 basis point increase in the cash rate in August.

However, a very strong set of labour force data has altered expectations with a 0.25% increase in July now a 50/50 chance according to Mr Aird.

"The RBA meeting in July is clearly 'live' and the labour force survey today sees us put the odds of a 25 basis point increase in the cash rate at 50%," he said.

"The RBA is aware of the lag between slowing spend and the impact is has on the unemployment rate.

“We expect 125 basis points' worth of easing in 2024, which would take the cash rate to 3.10% at the end of 2024.” 

Mr Aird believes policy easing of this magnitude will be required to avoid the unemployment rate lifting back to 5% - the level it sat pre-pandemic. 

CommBank will not make an official call on the July meeting until the monthly CPI indicator is released on 28 June.

Westpac - 4.35% is the peak

Last month, Westpac believed the rate hiking cycle was over, forecasting the terminal rate would remain on hold at 3.85% throughout 2023.

However, the RBA shocked market expectations by lifting interest rates to 4.10%.

Given this, Westpac Chief Economist Bill Evans had no choice but to pencil in another hike - likely in July. 

“Our reading of the June statement is that the Board believes that further work will need to be done in the near term to allay their concerns around inflationary expectations and wages growth,” Mr Evans said.

“Despite having increased the cash rate in both May and June we expect that a further rate hike will be required by the Board in July, to really emphasise their commitment to the inflation objective.”

ANZ - cash rate to hit 4.60%

Following the strong increase in employment in May and the decline in the unemployment rate to 3.6%, ANZ Head of Australian Economics Adam Boyton said a rate hike in July and August is now expected.

"We now see sufficient risk that the bank will need to increase rates beyond 4.35% that we had seen as the peak for this cycle," Mr Boyton said.

"As a result, we also look for a hike in August. That would bring the cash rate to 4.60%."


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