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Cash rate hike prediction steers towards 50 bps

Economists from three of the big four banks expect the Reserve Bank will hand down a similar cash rate hike of 50 bps today (5 July).

As the Reserve Bank of Australia (RBA) meets for its monthly monetary policy, economists at the big four banks believe the bump will be similar to May’s 25 bps or June’s 50-bp hike.

Last month saw the largest cash rate hike in 22 years taking the cash rate to 0.85 per cent, from its historic 0.1 per cent as RBA governor Philip Lowe tried to slow down runaway inflation – tipped to reach 7 per cent by the end of the year.

While the RBA had tipped the argument for a “steady” 25-bp rise, the minutes from the June board meeting said the decision to raise the cash rate by 50 bps was made as interest rates were still very low for an economy with a tight labour market and faced with a period of higher inflation.

Just how fast and how much the RBA plans to increase the cash rate is based on a number of economic factors discussed each month.

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As the first increase in interest rates had not impacted “most people’s” mortgage payments, and inflation was on the rise Mr Lowe said the July rise will likely be similar to the last two months.

“We’re going to look at the data we have each month and the level of interest rates and the inflation. But I expect we’ll be having the same discussion at our board meeting: 25 or 50,” Mr Lowe said last month.

Given this, economists at Westpac, NAB and CBA are expecting a rate hike of 50 bp today (5 July), while ANZ tips a 50 bps next month.

Westpac said it advocated “pushing hard” on rates at the beginning of the cycle, to steer inflation back down towards the RBA’s target between 2-3 per cent and acknowledged 50 bps was “fully justified”.

The bank said it expects the RBA to lift the cash rate by 50 bps, taking it to 1.35 per cent towards a “neutral zone” around 1.5-2 per cent.

“With the cash rate at only 0.85 per cent a second decisive move of 50 basis points is the appropriate policy,” Westpac economists have said.

“From our perspective the issue becomes one of when it will be appropriate to scale back the rate hikes as uncertainty around the impact of higher rates becomes more real.”

Economists at Westpac expect a similar 50-bp raise in August, as the interest rate will likely remain below its neutral zone (1.5-2 per cent).

“Our view is that a better policy would be to raise the cash rate by 50 basis points in August and then pause in September so that the unprecedented cumulation of four consecutive meetings totalling 175 basis points can be assessed,” Westpac said.

Similarly, NAB’s economist Alan Oster predicts a 50-bp rise in July and August, with a lowering to 25 bps in September, which would take the cash rate to 2.1 per cent by late 2022.

Following the historic low-interest rates, Mr Oster said there wouldn’t be any liquidity impact from these increases until “early to middle of next year”.

“What we’re looking for, in particular, is how the consumer behaves in this sort of environment,” Mr Oster said.

“Business confidence in Australia is still pretty good, [but] construction is not doing great because they’re saying they’re being killed.”

NAB data showed that SMEs had bounced back after the pandemic and mining and agriculture were strong performers, as well as retail. However, the construction industry had taken a hit following several big players closing their doors.

Commonwealth Bank paints a similar picture, tipping a 50-bp increase this month followed by a further 25-bp hike in August, September and November. While ANZ expects a 50-bp rise next month (August) with the bank forecasting a 25-bp raise in July, with one or two more increases over the year.

Consumers respond to interest rates

As the RBA keeps a watchful eye over consumer spending, as it begins the process of slowing spending to ease inflation, economist Diana Mousina at AMP noted consumer sentiment is weakening in response to rising inflation.

Ms Mousina said while the lifting of interest rates is geared towards slowing consumer demand, the central bank must “tread carefully” not to crush the consumer if it wants to avoid a serious growth downturn.

“The concern is around too many rate hikes crushing the consumer and causing a significant growth downturn. This depends on how high interest rates go, Ms Mousina said.

“Consumers feel the impacts from changes to the RBA cash rate mainly through adjustments to mortgage rates, with around 37 per cent of households having a mortgage.

“The share of housing interest payments relative to income were close to a record low at 4.4 per cent in March 2022 and we expect an increase to [approx] 7 per cent with the cash rate at 2.1 per cent.

As the market begins to adjust to rising interest rates, national average house prices have begun to fall, marking a 1.2 per cent drop, which Ms Mousina expects will continue. 

“This all points to more downside for home prices and we see national average home prices falling by 10-15 per cent top to bottom into 2023, Ms Mousina said.

Given that housing makes up “65 per cent of total wealth”, a decline in house prices has a negative impact for consumer wealth, and indeed consumer spending, she said.

While AMP expects there should be “enough positives” to avoid a serious downturn in consumer spending, it predicts the cash rate will peak around 2.6 per cent to get inflation back towards the 2-3 per cent target.

[Related: Savings to cushion borrowers from rate spikes]

Cash rate hike prediction steers towards 50 bps
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