CBA senior economist, Belinda Allen, believes the Reserve Bank of Australia (RBA) will lift the official cash rate one more time in August, taking it to a peak of 4.35%.
Allen notes that Australia’s core inflation is higher than other advanced nations:
“Weak productivity, rising electricity prices, the tight labour market, the higher-than-expected award wage decision and wealth effects from rising home prices are front of mind” for the RBA, notes Allen.
The latest RBA Minutes also made the point that the “policy rate in Australia was still lower than in many comparable economies and the recent experience of those countries highlighted the upside risks to inflation and the outlook for interest rates”:
CBA, therefore, “continue to think there are good reasons for a lower peak; the pass through to mortgage holders, high household indebtedness and the RBA’s desire to hold onto gains in the employment market are some reasons”.
“We expect the path of least regret for the RBA is one final rate hike in August given concerns over the time it could take for inflation to return to target as well as sticky core and services inflation”, notes Allen.
Westpac also expects the RBA to hike in August.
“By the August meeting we expect that the Board will be dealing with an inflation read still above 6%; an unemployment rate registering nearly 1ppt below the Board’s current estimate of full employment; and the recent report from the national accounts showing unit labour costs growing at 7.9% over the year”, chief economist Bill Evans noted today.
Financial markets are tipping at least one more rate hike:
My view is that another rate hike would be economically unwise given only around 60% of the RBA’s rate increases have been felt by households so far, and there is still a lot of tightening to come as fixed rate mortgages expire en masse over the remainder of this year:
Nevertheless, one further rate hike makes sense from a tactical viewpoint given outgoing RBA governor Phil Lowe only has two more monetary policy meetings before his term ends.
It makes sense for Lowe to deliver more tightening so that new governor Michele Bullock can take the reins with the RBA firmly entering an easing bias.
Then once Bullock starts cutting, she can take the praise.
