After the Reserve Bank (RBA) announced its third consecutive 50-basis point (bp) rate hike on Tuesday, economists have sought to forecast just how much more tightening is to be expected.
In a statement accompanying the latest decision, RBA governor Philip Lowe made clear that the central bank’s board expects to take further steps in the process of normalising monetary conditions in the months ahead.
However, he once again stressed that the RBA was not on a pre-set path for interest rates.
“The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market,” he said.
“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
The RBA has now forecasted that inflation will reach 7.75 per cent in 2022, up from a peak of 5.9 per cent as predicted in its most recent statement on monetary policy in May.
“The board places a high priority on the return of inflation to the 2 to 3 per cent range over time, while keeping the economy on an even keel. The path to achieve this balance is a narrow one and clouded in uncertainty, not least because of global developments,” said Dr Lowe.
Commonwealth Bank head of Australian economics Gareth Aird said that the RBA governor’s comments were indicative of a pragmatic approach to future rate decisions.
“We do not believe they are in a rush to take the policy rate much above their estimate of neutral (around 2.5 per cent),” he said.
“Indeed, we expect that once the cash rate gets to around that level, the RBA will pause to assess the impact that their policy tightening has had on the economy.”
CBA’s base case is for one more 50-bp hike in September followed by a 25-bp hike in November, bringing the cash rate to a peak of 2.60 per cent.
However, Mr Aird said that the RBA may raise rates by 25 bps based on upcoming data releases such as the second quarter wage price index later this month, in which case the bank expects three 25-bp hikes will be announced in September, October and November.
“Note that there is a significant dichotomy in the domestic economic data at present and this will continue over coming months,” he added.
“Backward looking labour market data will remain robust, wages growth will accelerate and inflation will remain elevated. But forward looking data has deteriorated and further weakness is expected.”
AMP chief economist Shane Oliver similarly predicted that interest rates would peak at around 2.60 per cent, which he noted was at the low end of current forecasts.
“Market and consensus expectations for the cash rate to rise above 3 per cent are too hawkish,” he argued.
“Global supply pressures on inflation appear to be easing; the RBA is already getting traction in terms of slowing demand and is starting to recognise this with downgrades to the outlook for economic growth; inflation expectations are still contained; and many households will experience significant financial stress with rising rates.”
In contrast, ANZ has predicted that the RBA will lift rates to 3.35 per cent by year’s end, with three additional 50-bp rate hikes expected in September, October and November.
ANZ head of Australian economics David Plank said that, while Dr Lowe’s statement did not make reference to the withdrawal of ‘extraordinary’ monetary support as in previous months, the bank still believes a 50-bp lift in September is the most likely scenario.
“The cash rate is still some way below the lower bound of the RBA’s estimate of neutral,” he stated.
Westpac also concluded that Dr Lowe’s statement did not appear to provide any evidence of a 25-bp hike in September. The bank has forecasted a 50-bp lift in September will be followed by four more increases of 25 bps, pushing the cash rate to 3.35 per cent by February next year.
Finally, NAB has also pencilled in a hike of 50 bps in September, followed by lifts of 25 bps in October and November to a peak of 2.85 per cent.
