CBA’s head of Australian economics, Gareth Aird, was one of the few forecasters to predict Tuesday’s 0.25% interest rate hike from the Reserve Bank of Australia.
According to the Bloomberg survey, 21 analysts expected no change to the cash rate in May and only 9 forecast a 25bp rate hike.
The money markets had priced a negligible ~12% chance of a 25bp rate increase.
Aird believes that the RBA has finished hiking rates, meaning 3.85% will be the peak in the cash rate. Although he acknowledges that “the risk in the near term sits with another rate increase”.
Aird also expects 50bp of rate cuts in Q4 23 and a further 50bp of easing in H1 24 as policy is taken to a more neutral level.
“The budgets of many home borrowers will be under considerable strain over the coming year”, Aird notes.
“The economy will slow as the lagged impact of the already delivered rate rises further weighs on consumer spending and by extension inflation”.
The latest 0.25% rate hike “means that the Board has now delivered an incredible 375bp of rate rises over just 12 months, which is an extraordinary amount of tightening”.
Moreover, Aird notes that the huge number of fixed rate mortgages expiring over the rest of the year means that monetary conditions will tighten anyway, draining consumption demand.
“There is still organic tightening to come in the pipeline as the big fixed rate home loan rollover continues in 2023 and 2024”, Aird says.
“The step change from ultra-low fixed rate home loans to significantly higher floating or fixed rate loans will drain the cash flow of many home borrowers and spending decisions will shift”.
Accordingly, CBA “continue to look for rate cuts in late 2023 as we believe inflation will fall more quickly than the RBA currently anticipates. And that the unemployment rate will lift more sharply”.
“We do not think the annual rate of inflation needs to return to target before the RBA cuts the cash rate. Rather we think a six month annualised pace of inflation that is close to target would be sufficient for the Board to ease policy given inflation is a lagging indicator”.
The RBA has explicitly forecast a per capita recession, given GDP is only forecast to increase by 1.25% cent this year – well below the circa 2% population growth.
Let’s hope the RBA doesn’t deliver us a full blown recession by going too hard on rate hikes.
