RBA holds again: Have interest rates hit their peak?

It just might be possible that the official cash rate, dictated by the Reserve Bank of Australia, has finally hit its peak.

June’s Consumer Price Index figures released at the end of the month seem to have proved pivotal in the RBA’s decision to hold rates at the August meeting, a second consecutive month of the rate staying at 4.1 per cent.

June was also a big month for what’s in store for the future at the Reserve Bank. RBA Governor Philip Lowe will depart shortly after the September meeting, at the end of his term. He’s to be replaced by his current Deputy Governor, Michele Bullock. It’s also been decided that The Board will start meeting just eight times a year, as opposed to the traditional 11 times a year, from 2024 onwards.

Like the rest of the country, we’ll try and analyse what the RBA has been communicating, while also delving into what experts and economists are saying about interest rates and their future.

What did Philip Lowe say at the August RBA announcement?

If you’ve been following commentary around the RBA’s decision making, then you’ll have heard Philip Lowe being described as “hawkish” by every news outlet, commentator, analyst and economist. In finance terms, hawkish is someone who is in support of raising interest rates to fight inflation, even to the detriment of economic growth and employment.

Lowe indeed remained hawkish in the latest announcement, but maybe less hawkish than previously. It was the most open Lowe has been talking about inflation, which was clearly the driver for the rate hold.

“The recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow,” Lowe said, suggesting it will be around 3.25 per cent by the end of 2024 and within the two to three per cent target range in late 2025.

He did however add that there are “significant uncertainties.”

“Services price inflation has been surprisingly persistent overseas and the same could occur in Australia. There are also uncertainties regarding the lags in the operation of monetary policy and how firms’ pricing decisions and wages will respond to the slowing in the economy at a time when the labour market remains tight.”

Lowe also suggested the outlook for household consumption is another ongoing source of uncertainty.

“Many households are experiencing a painful squeeze on their finances, while some are benefiting from rising housing prices, substantial savings buffers and higher interest income. In aggregate, consumption growth has slowed substantially due to the combination of cost-of-living pressures and higher interest rates.”.

The Governor was steadfast in his conclusion in the statement, a sentence which has been closely watched since it was first included in April.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will depend upon the data and the evolving assessment of risks.”.

In the meetings before the April announcement, Lowe said “further tightening of monetary policy will be required,” as opposed to “may”.

What are the experts saying?

Nearly three quarters of panellists in Finder.com.au’s RBA Cash Rate Survey correctly predicted the cash rate would hold in August. Three quarters of panellists also believe the cash rate will peak between July and September this year. The panel's forecast for the average cash rate peak is 4.4 per cent.

CoreLogic’s Research Director Tim Lawless said that while the RBA’s decision to hold the cash rate, it doesn’t necessarily signal an end to the rate hiking cycle.

“Considering the RBA is working with a mixed bag of key data sets that guide their decision making, another rate hike down the track remains a possibility,” Lawless said.

“We will see more detail on the RBA’s economic perspectives when the quarterly Statement on Monetary Policy is published on Friday, but considering the aforementioned opposing trends, another rate hike can’t be dismissed.”

Eleanor Creagh,  PropTrack Senior Economist, said subsiding momentum in inflation and consumer spending has eased the pressure off the RBA to continue lifting interest rates.

“This allows more time to assess the economic outlook as it tries to engineer a soft landing whilst returning inflation to target,” Creagh says.

“The high level of inflation that has challenged the Australian economy and seen interest rates rise at the fastest pace in a generation, continued to moderate in the June quarter.

“Though still high relative to history and well above the RBA’s 2-3% target range, CPI inflation was below both market expectations and the RBA’s official forecasts and looks set to continue to moderate and move lower into the first half of 2024.”

Chief economist KPMG Brendan Rynne expected the rate to hold, but they expect one more rate rise. They predict that will come in September, Lowe’s last meeting, given his repeated stance has been that The Board will do whatever it takes to control inflation.

What are the banks saying?

The Big Four predictions before the August hold changed significantly in the space of 48 hours.

Before the August rate hold:

• CBA: One more hike to a peak at 4.35%
• Westpac: One more hike to a peak at 4.35%
• NAB: Hold in August, but potential for one to two more hikes in coming months
• ANZ: A second consecutive pause at 4.1%

After the August rate hold:

• CBA: peak of 4.1%
• Westpac: peak of 4.1%
• NAB: One more hike in November 2023 to a peak of 4.35%
• ANZ: peak of 4.1%

The Big Four have been way off with their expectations over the last few months, and all of them changed their view following the August rate hold. Only Commonwealth Bank, the nation’s largest lender, predicted a rate hold in July, while most were predicting both a rise in July and August.

Westpac were the furthest off. Even after the July pause, and the inflation decline, Chief Economist Bill Evans said they still predicted an August rate rise. Now they’ve decided rates will be paused for a prolonged period.

“Westpac expected that the case for another rate increase – based on high services inflation; the 50 year low in the unemployment rate; the clear tightening bias; the unlikely prospect that the staff would lower its inflation or growth forecasts; and only very modest increases in the unemployment rate – was respectable,” Bill Evans said.

Now they believe September might be another close call, but after that, they don’t believe October will see a hike, because the RBA will wait to see the October CPI data. The November rate call will be predicated on the inflation figures, which will likely see ease further.

Evans says the next challenge for the outlook should now be the timing for the beginning of the easing cycle.

“When Westpac was forecasting rate hikes in both August and September, we were comfortable with the cycle beginning in the June quarter of 2024. That timing now looks more likely to be in the September quarter 2024 when we expect the unemployment rate to be nearing 5% and inflation in the 3–3.5% range.”

It should be noted that it was only April when Westpac were forecasting the first rate cut to come in March 2024, and by the end of 2024 they thought the rate to be down to 2.85 per cent, so please don’t buy a house based on economists forecasts. After all, before rates started rising in May last year, Governor Philip Lowe had repeatedly said there wouldn’t be any rate rises until 2024 at the earliest.

ANZ have also changed their tune, but they changed it following the July hold. Despite suggesting the CPI data wouldn’t change their expectation for a terminal cash rate of 4.6 per cent, it has.

“[The change in forecast] reflects an assessment of the economy based on a deterioration in forward-looking labour market indicators, good news on the global inflation front and increasing anecdotal evidence (including our own spending data) that the most recent rate hikes have had an impact on consumer behaviour.”

When will rates start to go down?

Each of the Big Four banks have weighed in as to when they think rates will start going down.

• CBA: Four cuts next year, starting in March, down to a cash rate of 3.10% by end of 2024.
• Westpac: First cut in September 2024. Total of six cuts across 2024 and 2025 to 2.60% in late 2025.
• NAB: Five cuts in 2024 and 2025 to a cash rate of 3.10% by early 2025.
• ANZ: One 0.25% cut in late 2024.

CBA now expects the cash rate will start falling from March of next year, only a slight change from their prediction of February.

Westpac believes it will be September next year when conditions will allow the board to begin easing rates, a stark contrast to what they said in April. They had said the first rate cut will be in March, and by the end of 2024 they forecasted the rate to be down to 2.85 per cent.

ANZ doesn't think rates will come down until the very end of 2024, driven by both a higher unemployment rate and confidence inflation is returning to the band.