Economists broadly expect the Reserve Bank of Australia (RBA) to keep interest rates on hold at 4.1 per cent in September, which would mark the third consecutive pause by the central bank.
This sentiment is mirrored in the prevailing market forecasts, as indicated by ASX’s RBA Rate Indicator on 31 August, which suggests an 86 per cent probability of the cash rate remaining unchanged this month.
Commonwealth Bank senior economist Belinda Allen explained that the September meeting is not viewed as a difficult decision to make, unlike the more closely contested decisions in July and August.
“The data flow over the past month and the large amount of rate hikes delivered to date make it a clearer decision in September. However, we expect the RBA will still run through the case to hike and maintain a tightening bias,” she said.
Namely, since the bank’s last meeting in August, the data flow has fallen short of both market expectations and the bank’s own forecasts.
Firstly, labour force data surprised with the unemployment rate reaching 3.7 per cent in July, up from 3.5 per cent in June, while the latest wage price index (WPI) undershot predictions with subdued growth of 0.8 per cent in June.
Finally, the July monthly consumer price index (CPI) indicator eased to 4.9 cent over the 12 months to July, as opposed to the 5.2 per cent lift that had been predicted.
“The relative lack of data on services prices in the month of July, the main area of concern for the RBA will likely keep them on high alert,” Ms Allen noted.
“Overall though, inflation is heading in the right direction and adds to the considerable amount of softer data released this past month that makes the case for the cash rate to remain on hold.”
But others expect further tightening of monetary policy in the months ahead, particularly given inflation remains above the RBA’s target range.
Incoming RBA governor Michele Bullock has indicated that the bank will maintain close watch of the data and make decisions on a monthly basis until at least next year.
“I think all central banks at the moment are grappling with how much further they need to go, the persistence of inflation, particularly core services inflation, and whether or not they’ve done enough or whether there remains a little bit more to be done,” she said.
“I’m reluctant to give any sort of predictions on how long interest rates might have to stay high. In Australia’s case, all I can say is that we may have to raise interest rates again.”
The potential for future hikes also continues to be reflected in the RBA’s communication.
This included the August meeting minutes in which the bank said: “members agreed that it was possible that some further tightening of monetary policy might be required to ensure that inflation returns to target in a reasonable timeframe”.
One more hike this year?
While economists mostly agree a pause will ensue in September, there is less consensus on the future path of interest rates and whether 4.1 per cent is the peak.
Economists at three of the big four banks, including CBA, do not expect the RBA to hike rates again in the current cycle. This stands in contrast to the views held at NAB.
NAB economists have forecast that a peak of 4.35 per cent will most likely be reached at the RBA’s November meeting which follows the release of the third quarter CPI.
“With recent data showing a clear trend of easing inflation and slower demand growth, the probability that 4.1 per cent is the peak for the cycle is growing – particularly given the RBA’s stated intention to seek to maintain the pandemic-era gains in the labour market,” they said.
“However, a number of near-term upside pressures remain likely to challenge the RBA’s risk tolerance around inflation – particularly on the services side.”
HSBC chief economist Paul Bloxham is also of the view that another hike is on the horizon, despite acknowledging that the economy appears to be progressing along the “narrow pathway” that the RBA had envisioned.
“Inflation remains too high for the central bank, well above the RBA’s 2-3 per cent target band. Low productivity growth may also mean that the current rates of wages growth are inflationary, placing upwards pressure on services inflation,” he explained.
“As such, our central case is that another 25 bp hike may yet be delivered by the RBA, pencilled in for Q4 2023. The risk though, given the slowdown in global growth and China’s recent growth indicators, is that the RBA chooses to maintain current settings for longer.”
In light of HSBC’s view that core inflation will remain elevated “for some time yet”, Mr Bloxham said that rate cuts are not expected over the next few quarters, with the first cut currently pencilled in for the third quarter of next year.
The RBA’s September board meeting will mark Philip Lowe’s last decision as governor, with Ms Bullock officially taking over duties on 18 September.
