Interest Rates - Where to Next?
The big question on everyone’s lips is will the RBA raise interest rates for the 13th time in 15 months at its next board meeting tomorrow. The cash rate currently sits at 4.1% after the RBA paused at the July meeting.
Interest rates have increased by 4 percent age points since May last year. Given the uncertainty surrounding the economic outlook, the Board decided to hold interest rates steady this month, allowing time to assess the impact of the increase in interest rates to date and the economic outlook.
It is no secret that inflation in Australia has passed its peak of 8.4% recorded in December 2022 and the monthly CPI indicator for June showed a further decline to 5.4%. This is still above the RBA’s preferred 2%-3% range but definitely heading in the right direction. The Board’s priority is to return inflation to target within a reasonable timeframe. Most pundits are suggesting this is December 2023.
The Board is still expecting the economy to grow as inflation returns to the 2–3% target range. The combination of higher interest rates and cost-of-living pressures is leading to a substantial slowing in household spending. While housing prices are rising again and some households have substantial savings buffers, others are experiencing a painful squeeze on their finances. There are also uncertainties regarding the global economy, which is expected to grow at a below-average rate over the next couple of years.
Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will depend upon how the economy and inflation evolve.
CommBank's most recent prediction is that the RBA will make one further rise of 25 basis points, likely in August, bringing the cash rate to a peak of 4.35%. CommBank predicts that there will be cuts beginning in the first quarter of 2024,bringing the rate to 3.10% by the end of the year.
ANZ, which had forecast a rate rise at the July meeting, said it was “reluctant to back away from our call of a 4.6% peak just yet.” That may have changed after last week’s better-than-expected June CPI figures and weaker Retail Sales data.
We believe the Reserve Bank has been given another reason to leave rates on hold at its meeting tomorrow, with weaker than expected retail spending figures showing the impact of mounting cost-of-living pressures taking effect.
