RBA to increase cash rate to 4.35%

Economists in a rapid Reuters poll predict that Australia’s central bank, the Reserve Bank of Australia (RBA), is likely to implement a 25 basis point interest rate increase on August 1, following a pause announced earlier this week. However, the economists are divided on when and at what level the borrowing costs will peak.

After two consecutive 25 basis point hikes in May and June, the RBA opted to maintain the rates this time, leaving analysts and market traders uncertain about the future course of action. The RBA commenced its tightening policy in May 2022 and had raised rates at every meeting since, with the exception of a pause in April. The decision to keep the rates unchanged on July 4 was made to assess the economic impact of the previous increases.

In May, inflation showed signs of slowing to 5.6% on a monthly basis, down from 6.8%, but still significantly higher than the targeted 2.0% level. Alongside a robust job market and a rebound in house prices, expectations have strengthened for an interest rate hike during the August meeting. Detailed quarterly inflation data is scheduled for release on July 26, just days before the meeting.

In a poll conducted on July 4-5, over 90% of respondents (23 out of 25 economists) anticipated a 25 basis point increase in the RBA’s official cash rate to reach 4.35% during the August meeting. Adam Boyton, head of Australian economics at ANZ, suggested that the RBA’s upcoming forecast update could tip the balance in favour of an August rate hike. However, the timing of subsequent rate adjustments remains uncertain, with September or October being the favoured months.

ANZ, CBA, NAB, and Westpac, the major domestic banks, all forecast a quarter-point increase in August. Nevertheless, economists have not reached a consensus regarding the timing and level at which rates will peak in this cycle. Approximately 45% of respondents (10 out of 22 economists) expected one more rate hike in September, bringing rates to 4.60% by the end of the quarter. The remaining 12 economists believed rates would remain at 4.35%.

Among those with a longer-term perspective, 11 out of 20 economists anticipated that rates would peak at 4.60% or higher by the end of 2023, aligning with market pricing. Chris Read, an economist at Morgan Stanley, stated, “Given this pause looks to be more around slowing the pace of tightening than a shift in the view of what is ultimately required, we retain our view of two more hikes and a 4.60% terminal rate.”