Terminal rate forecasts rejigged following RBA decision

Given the surprise move, several economists have now upped their terminal cash rate forecasts.

ANZ, the Commonwealth Bank of Australia (CBA), and Westpac all now expect the cash rate to peak at 4.35 per cent.

Gareth Aird, CBA’s head of economics, had previously tipped the cash rate to peak at 3.85 per cent (but noted the near-term risk was for another rate increase).

However, after noting the RBA’s “incredibly aggressive” tightening cycle, Mr Aird said that the bank now expects one further 25-bp increase in the cash rate for a peak of 4.35 per cent.

This, he said would most likely be at the August board meeting but warned that the risk is a 25-bp rate hike earlier, in July. He also suggested there was a risk of 25-bp rate rises in both July and August, which would take the cash rate to 4.6 per cent.

“The annual rate of inflation is currently much higher than is desired. But we thought following May’s 25-bp rate increase the RBA board would let the ‘long and variable’ lags of monetary work their way through the system with the objective of ‘keeping the economy on an even keel’,” he said.

“We now expect one further 25-bp increase in the cash rate for a peak of 4.35 per cent and see it most likely at the August board meeting.”

Moreover, the bank economist has now pushed back the date on which it expects rates to start coming down — pushing it out from 4Q23 to 1Q24. It then expects 25 bps of easing in 2024 — ending next year with a cash rate of 3.10 per cent.

Mr Aird said: “We believe policy easing will be required of this magnitude over 2024 to avoid the unemployment rate lifting back to 5.0 per cent — around the level it sat pre‑pandemic, which is above most estimates of the NAIRU (non‑accelerating inflation rate of unemployment).

“It is possible that the RBA leaves policy on hold for an extended period in 2024 if inflation proves hard to return to target and unit labour costs don’t decelerate enough. If such an outcome transpires, we believe the Australian economy will not have a soft landing.

“Our economic forecasts will be downgraded as a result of our change in RBA call and the 25-bp rate hike delivered in June.”

Meanwhile, Westpac — which was the first major bank to announce it would be passing on the June hike to home loan borrowers (from 20 June) interest rate changes — also now expects a “follow-up move in July with risks of a further increase in August”.

Westpac’s chief economist Bill 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.

“Thereafter the risk is that a further follow-up move may be required at the August meeting when the June quarter inflation report will be available.”

The additional risk for the August meeting, he said, was if they raise their inflation forecasts, which “would open the door to another rate increase”.

Westpac had been expecting the first rate cut in the next easing cycle to come in February 2024 with at least 100 bps of cuts over the course of next year, however, it said that it may review its growth profile as new data emerges.

ANZ had moved its terminal cash rate forecast ahead of the RBA meeting this week, also pipping it to peak at 4.35 per cent.

“We no longer see 4.1 per cent as sufficient to bring inflation back to the target in a reasonable period of time,” ANZ head of Australian economics, Adam Boyton, said.

“On the timing, we acknowledge the challenge of calling the RBA from month to month. We consider August the most likely month for a move, driven by the quarterly forecast update cycle and uncomfortable timing around the return of inflation to the target.”

National Australia Bank (NAB) has not yet updated its cash rate forecast and, at the time of writing, was still calling a peak of 4.10 per cent by July 2023 and then dropping to 3.10 by July 2024.

Given the RBA has now lifted the cash rate 12 times since May 2022, many borrowers are feeling the pain, with brokers flagging that the most recent hike may push people into financial hardship and some suggesting that the RBA may tip the Australian economy into recession.

[Related: Rate hike to 'tip people into financial hardship', warns broker]