RBA tipped to moderate frantic rate rises

The Reserve Bank of Australia is tipped to moderate its recent frantic push to raise the official interest rate in an effort to stamp down rising inflation, with financial markets lowering expectations for September.

On Tuesday, the central bank lifted the overnight cash rate by half a percentage point, or 50 basis points, for a third consecutive month, taking the cash rate to 1.85 per cent.

Before Tuesday’s meeting, investors were expecting a fourth double increase of 0.5 percentage point. But a less hawkish tone from RBA governor Philip Lowe suggested a return to a 0.25 percentage point rise was now likely.

“What was of note was the tone of the statement,” HSBC chief economist Paul Bloxham said, which highlighted a marked slowdown in economic growth this year and the next, and an upward tick in unemployment.

“In our view, the cooling housing market, weakening consumer spending and global downturn are set to worsen in the next few months, which we expect will see the RBA pivot to smaller hikes from here,” Mr Bloxham said.

Financial markets are pricing in a cash rate at 3 per cent by December and a peak at 3.2 per cent by Easter?before edging lower later next year and early in 2024 as higher borrowing costs stymie rising costs.

The S&P/ASX 200 Index added 5.1 points to 6998.1 on Tuesday; the All Ordinaries added 3.4 points to 7216.4. Stocks turned green late in the session following?the RBA’s downgrades to growth forecasts.

Extra $944 a month for a $1m loan

If fully passed on to borrowers, the recent series of rate rises adds $472 to monthly repayments for a typical $500,000 mortgage, $708 for $750,000, and $944 a month for a household with a $1 million loan.

Macquarie Bank, which last week reported strong growth in its home loans and deposits businesses, was first out of the blocks to raise borrowing costs.

It lifted deposit rates by the full half a percentage point on transactions account balances up to $250,000, as well as passing on the full increase to its mortgage customers.

Before the bank’s quarterly statement of monetary policy on Friday, Dr Lowe revealed the bank expected economic growth to slow to 1.75 per cent in both calendar 2023 (down from 2 per cent) and 2024.

Unemployment was forecast to edge higher to 4 per cent by the end of 2024 as a result of slowing activity.

Inflation forecasts were also updated. The bank now expects headline CPI to peak at 7.75 per cent this year, in line with Treasury’s estimates.

The pace of inflation accelerated last month, as the Melbourne Institute prices gauge rose 1.2 per cent, the fastest rate in two decades. That stemmed in part from higher energy prices flowing through to household budgets.

Despite growing criticism, Dr Lowe said rising interest rates were necessary to bring inflation back to the 2 per cent to 3 per cent target and to create a sustainable balance of demand and supply.

“The board expects to take further steps in the process of normalising monetary conditions over the months ahead, but it is not on a pre-set path,” Dr Lowe said in his usual post-meeting statement.

“The board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”

Painting a rosy picture

In the short term, the governor painted a rosy picture of an economy with strong employment growth, resilient consumer spending, an upswing in business investment well under way, and excellent terms of trade.

The tight jobs market was also expected to push wages higher in coming months, though still well behind price rises.

“The bank’s central forecast is for [gross domestic product] growth of 3.25 per cent over 2022,” Dr Lowe said, down from 4.2 per cent tipped in May. Looking ahead, however, growth was tipped to slow.

Despite the softer tone from the RBA governor, all the big four lenders continue to forecast a fourth 0.5 percentage point rate rise next month, though the risk was now to a smaller outcome.

National Australia Bank chief economist Ivan Colhoun said the RBA’s push to bring inflation back within the target band would probably require the cash rate to push into restrictive territory.

NAB expects 2.85pc rate by end of year

“NAB’s view is that seeking a return to 2 per cent, 3 per cent inflation will likely require at least a slightly restrictive monetary policy setting, which we suggest is in the 2.6-2.85 per cent cash rate range,” he said.

“NAB remains comfortable with its 2.85 per cent cash rate forecast for end 2022 but continues to see a step down in the size of rate increases after this next meeting and a likely pause before the year-end.

“The ‘not on a pre-set’ path [comment] is likely to see significant debate about whether the bank might even step down the pace of rate increases at the September board meeting, while continuing to tighten.”

Gareth Aird, Commonwealth Bank head of Australian economics, took a different tack, saying Australia’s largest mortgage lender did not expect the RBA to push interest rates into restrictive territory.

“We expect the cash rate to be 2.6 per cent by November,” Mr Aird said. “Our base case is a further 50 basis point hike in September and a 25 basis point hike in November.

“But the RBA could shift to ‘business as usual’ 25 basis point monthly increments from here if the upcoming data makes the case.

“On that basis we would expect three consecutive 25 basis point rate hikes (i.e. September, October, November) to still arrive at the same terminal rate of 2.60 per cent in November.”

ANZ head of Australian economics David Plank also suggested the RBA may be considering a pullback to a 25 basis point increase in September.

“The RBA tightened by 50 basis points at its August meeting,” Mr Plank said. “The key change from July is that there is no longer any reference to the withdrawal of?extraordinary?[our emphasis] monetary support.

“This could be a signal that the RBA Board may be thinking about reducing the size of the monthly increases to 25 basis points in September. We think a 50 basis point increase is still the most likely choice.”

- with Ayesha de Kretser

SOURCE: https://www.afr.com/