Most Australian economists now expect the Reserve Bank of Australia (RBA) will keep interest rates on hold for the remainder of this year, ahead of its first rate cut next year.
AMP chief economist Shane Oliver said the cash rate has likely already peaked at 4.10 per cent. In fact, he has pencilled in four cuts for next year as the economy and inflation continue to slow.
“Absent much stronger than expected wages growth, a further drop in unemployment and/or a reversal of the downtrend in inflation, the RBA is expected to leave interest rates on hold for the rest of this year ahead of rate cuts next year,” he predicted.
Dr Oliver noted that the RBA’s decision to keep rates on hold in September was consistent with the softer jobs, wages, and inflation data released during the past month, as well as increasing signs that household spending is rapidly weakening.
“Our view remains that the RBA has already done more than enough to slow the economy in order to rebalance demand and supply and bring inflation back to target,” he said.
Dr Oliver also noted that, as a result of the RBA’s ongoing rate hikes, the risk of a recession in Australia in the next year is “very high”.
“Continuing to raise interest rates will only add to the already very high risk of unnecessarily knocking the economy into recession,” he warned.
“At the very least, the economy is likely to have slowed substantially by year end or early next year with unemployment starting to rise faster than the RBA is allowing for.
“Given the lags involved and the increasing signs that monetary tightening is working, it makes sense for the RBA to remain on hold so it can better assess the impact of the rate hikes.”
Commonwealth Bank senior economist Belinda Allen also predicted that interest rates have already peaked in Australia. The bank has forecast an initial rate cut by the RBA in March next year and a total of 100 basis points (bps) of easing throughout 2024.
“The narrow path the RBA has been hoping to achieve – one where inflation comes back down gradually to target and some of the gains in the labour market are retained, seems to be more probable than initially expected,” she said.
Ms Allen also drew attention monetary tightening delivered by the RBA since May last year, the full effects of which have yet to flow through to the economy.
“Evidence is accumulating that these rate hikes are working, and with the delays in transmission, this impact will continue for some time yet. Holding interest rates steady will allow the RBA more time to assess the impact,” she said.
ANZ head of Australian economics Adam Boyton reiterated the view held by the bank’s economists since July that the RBA is now on an “extended pause” but suggested that future monetary easing was still expected to be “a considerable way off”.
“Overall, we see nothing in today’s decision or statement to push us off our view that the RBA is on an extended pause as it examines how the 400 bp of monetary tightening to date washes through the economy,” he said.
Similarly, Westpac has held firm to forecasts made following the RBA’s August decision, in which it declared the end of the tightening cycle and said that the next move was likely to be a rate cut next August.
“We believe that the likely ongoing weakness in spending and the continuing reduction in inflation is likely to close any window for further ‘insurance’ to assist with the return to target. The governor’s statement today certainly supports that view,” he said.
Meanwhile, Harvey Bradley, portfolio manager at Insight Investment, said it was becoming increasingly apparent that RBA believes it has sufficiently tightened financial conditions.
“It is clear every meeting will remain live from here and the market will remain very sensitive to the incoming data given the uncertainty which remains around the macro outlook,” he noted.
“The risks for growth remain to the downside but the risks for inflation remain to the upside. We expect that the RBA will be on hold for an extended period, until they can be confident inflation has returned to their target on a sustainable basis.”
