Big 4 expect 50-bp increase today

Australia’s major lenders have unanimously predicted that the Reserve Bank of Australia (RBA) will increase the cash rate by 0.50 per cent for the fourth month in a row today (6 September).

While the central bank began increasing rates in May, it has been passing down larger rate hikes the past few months as it attempts to curb rising inflation.

Following June, July and August's 50-basis-point (bp) hikes, economists at the big four banks now all agree that the trend will continue for September's rate call today.

The Commonwealth Bank of Australia (CBA) highlighted that the expected 50-bp hike at today's RBA board meeting would take the cash rate to 2.35 per cent — its highest level since 2015.

The bank has suggested that the true consumer impact is yet to be seen due to a ‘lag’ between rates rising and borrowers feeling the pinch.

According to CBA, there’s a three-month lag between an RBA hike and impact on home borrower cash flow.

Its economics team suggested that some borrowers have barely felt the impact of the RBA’s rapid 175 bps of tightening since 4 May from a cash flow perspective.  

“It’s like having five shots of vodka in an hour and saying, everything is OK. But you know that it will soon have a big effect,” CBA head of Australian economics, Gareth Aird, told The Australian’s Inquirer column.

“So, the RBA need to pause in the not-too-distant future to see what effect it is having because they’re relying on lagging data as well. They’re flying blind and they’ll need to stop at some point soon and just wait to see how people respond.”

The lag largely explains why the official spending data has remained strong, it suggested, despite consumer sentiment sitting at levels associated with a recession or major negative economic shock.

Westpac Banking Corporation (Westpac) has mirrored this sentiment stating: “We are confident that the board will decide to raise the cash rate by a further 50 basis points to 2.35 per cent," said Bill Evans, the bank's chief economist.

“The statement from the governor following the meeting will be closely scrutinised,” he added, noting he expected the bank would “strengthen the rhetoric we saw in the August Statement”; maintain the term “not on a pre-set path”; and, following [Federal Reserve chair Jerome Powell's recent speech that] at “some point” it will be appropriate to slow the pace of tightening while emphasising that the cycle may have considerably further to run.”

Raising the cash rate by 50 bps will move the cash rate into the “neutral zone”, Westpac continued.

Smaller increases to come?

While NAB group chief economist, Alan Oster, has concurred with his economist counterparts, he has suggested future increases will be smaller.

“Our expectation would be that they will do 50 [basis points in September],” he explained via a NAB’s Group Economics podcast, recently. 

“I suspect [the governor] will then start to say, well, we've made a lot of ground. Maybe move back to more normal increases like 25 [basis points]. 

“What we have is that after [September’s] 50 [basis points], another couple of 25. Watch for a while to see what happens,” he said. 

However, unlike NAB, Australia and New Zealand Banking Group Limited (ANZ) proffers there could be another 50-bp increase in October.

According to recent media reports, ANZ head of Australian economics, David Plank, doesn’t think Tuesday’s 50-bp hike will be the last such move by the RBA.

He says given the strength of inflationary pressures; ANZ believes the RBA would want to take the cash rate ‘some way above’ the estimate of the bottom of the neutral range.

ANZ therefore foresees a 50-bp rate hike in October being more likely than 25 bps.

Speaking on Monday about the RBA's meeting today, Prime Minister Anthony Albanese said he has “confidence” in the central bank.

“I do have confidence in the RBA and I think it's appropriate that the government allow the RBA to do its job,” he told ABC Radio National Breakfast.

However, the federal government is currently undertaking a review into the central bank, which Treasurer Jim Chalmers MP has said will investigate the central bank’s “goals and objectives, tools and levers, processes and public commentary”.

Notably, this will include the continued “appropriateness” of the inflation-targeting framework — which has been criticised this past year.

[Related: RBA keeps options open for September]