CBA calls October 25-bp cash-rate hike

With the RBA’s “clear hint” the pace of cash-rate hikes could be about to slow, the Commonwealth Bank of Australia (CBA) said this supports its call that next month’s cash rate will increase to 2.60 per cent, continuing with “one final 25bp” to 2.85 per cent in November, according to CBA’s “central scenario”.

“The RBA Governor’s recognition of the lags coupled with his comment today that the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises supports our call that the next move in the cash rate will be a ‘business as usual’ 25bp hike at the October Board meeting,” the bank explained.

“Such a move would take the cash rate to 2.60 per cent.

“From there our central scenario sees the RBA deliver one final 25bp rate hike at the November Board meeting which would take the cash rate to 2.85 per cent.

“This previously was the risk to our base case and today we have incorporated that risk into our central scenario.

“We continue to look for RBA rate cuts in H2 2023 and have 50bps of easing pencilled in.”

Aside from the governor’s colourful description of high inflation as “a scourge”, the CBA said of most importance were his comments that: 

• The RBA board expects further increases in interest rates will be required over the months ahead.
• The board is not on a preset path.
• The board is conscious there are lags in the operation of monetary policy and that interest rates have increased very quickly.
• That it recognises, “...all else equal, the case for a slower pace of increase in interest rates becomes stronger as the level of the cash rate rises.”

“The Governor’s speech had something in it for everyone,” according to the CBA, describing the Inflation and the Monetary Policy Framework delivery as an “... archetypal two‑handed economist speech.”

Official spending data remains strong — but why?

As the CBA explained, it wrote about the lags in the operation of monetary policy in its 5 September-dated Economic Insight, illuminating that there is on average a three-month lag between an RBA rate hike and when CBA borrowers on variable-rate mortgages experience an increase in their home loan repayments.

“The lag largely explains why the official spending data has remained strong, but consumer sentiment sits at levels associated with a recession or major negative economic shock,” it stated.

Last Thursday’s RBA speech was the first such speech from the governor in almost two months, coming just two days after the bank again raised the cash rate by 50 bps to 2.35 per cent.

[Related: Big four expect 50bps increase today]