Major banks share their predictions
With inflation starting to ease and interest rate rises continuing to trickle through to mortgage repayments, major bank economists are ruling out a rise to the official cash rate in June.
The OCR, currently 3.85%, has increased 11 times since May 2022. Following a pause in April, the RBA delivered a further 25-basis point hike in May.
The Commonwealth Bank of Australia is of the view that data released since the Reserve Bank May Board meeting does not support a June hike.
Speaking on MPA Pod earlier this month, CBA head of Australian economics Gareth Aird (pictured above left) said that assuming that the data was in line with the RBA’s forecast (or a little softer) the bank’s view was that the official cash rate would now at the peak level within the current cycle.
“Our overall assessment now is that if the economic data comes in line with their updated forecast (or a little bit softer), we’re at the peak in the cash rate now,” Aird said.
Prior to incoming household consumption data for the first quarter of 2023 (released in June), he noted that the rate of growth in consumer spending had moderated throughout 2022.
“We’ve already had a read on quarter one retail sales volumes, and they’ve contracted … if we look at our internal spending data at Commonwealth Bank, the growth rate in nominal terms is continuing to come down,” Aird said.
He said that it was clear to CBA that the economy was slowing due to the interest rate rises put through to-date and the lagged impact on consumers.
“We’re pretty comfortable with the view that as we go through this year, consumer spending will continue to moderate and there’s a clear risk that the volume of household consumption contracts for a quarter or two, given the lagged impact of the rate hikes,” Aird said.
CBA’s forecast for a June hold is in line with the predictions of NAB, ANZ and Westpac. NAB chief economist Alan Oster (pictured above right) and ANZ senior economist Adelaide Timbrell (pictured above centre) confirmed to MPA that their forecasts were also that the RBA would hold the OCR in June, as did Westpac Business Bank senior economist Besa Deda.
Are further cash rate rises expected?
CBA’s core forecast is for no further rises to the official cash rate.
Aird said that it would take an upside surprise relative to the RBA’s forecast profile for the central bank to hike again from here.
Referring to the 0.25% rate hike in May, Aird said while markets had around a 12% chance of a rate hike priced in, CBA expected the increase. The RBA was going to put out a set of inflation forecasts a few days later that had no change to their inflation profile, (which was for inflation not to return to target until mid-2025), and therefore had a “hiking bias” going into the May meeting.
The Reserve Bank’s forecast, as published in its May statement, was for annual inflation, currently 7%, to be 4.5% in 2023 and 3% in mid-2025. Gross Domestic Product (GDP) is forecast to increase by 1.25% this year and around 2% over the year to mid-2025, and the rate of unemployment is forecast to increase gradually, to around 4.5% in mid-2025.
Aird said the bank’s view was that the data would come in a little softer than the Reserve Bank’s forecast.
“When they’ve got that near term hiking bias (which I think they’ll keep until it’s clear the data is not printing stronger than their forecast), there is still a risk that in the short-term, we do get one more rate rise,” Aird said.
Oster confirmed to MPA that the bank was forecasting one further hike by August (possibly in July).
“That is the peak for us but we’re not ruling out another one … we forecast cuts back to 3% by mid-2024,” Oster said.
Timbrell said that the bank’s current call was for the next hike to be in August. She noted that risks in ANZ’s forecast were tilted towards “earlier and more action”.
Deda said Westpac viewed the current OCR of 3.85% as the peak, but that there was "some risk of further tightening", given that inflation remains elevated and the extended time period forecast to return inflation to the Reserve Bank's target band.
Impact of existing rate hikes still flowing through
Following the 0.25% OCR increase in May, and assuming the RBA doesn’t hike the OCR any higher, Aird confirmed that borrowers were likely to feel the full impact of the 11 rate hikes in August.
“The last upward adjustment that [borrowers] will have to their mortgage repayments will be around August,” he said.
Referring to the significant portion of borrowers on fixed rate mortgages who have so far been insulated from interest rate rise, Aird noted that these borrowers would encounter “a very significant step change” in their mortgage repayments when their fixed rate rolls over.
He noted fixed rate borrowers would be rolling off an average fixed mortgage interest rate of 2% to 2.25%, to a floating rate of around 5.5% to 6%.
“There’s a lot of tightening still to come in the pipeline and that story will continue well after August even with the Reserve Bank on hold, simply based on the profile of the fixed rate home loan expiry,” Aird said.
Aird confirmed that Commonwealth Bank mortgage customers who roll off a fixed rate onto a floating rate start being charged the higher rate of interest as soon as their loan rolls onto the new rate. The requirement to meet those higher mortgage repayments doesn’t take effect for around two months after the fixed rate rollover date, he said.
This illustrates that there are lags as to when the full impact of interest rate rises flow through.
“The overall message is that there’s still a lot of climbing to come through, even if the Reserve Bank leaves the cash rate on hold from here,” Aird said.
The Reserve Bank of Australia is due to announce the official cash rate on June 6.