The latest Australian interest rate futures pricing suggests that the Reserve Bank of Australia (RBA) will increase the official cash rate once more this year, taking it to a terminal peak of 3.60%.
However, Australia’s largest bank and mortgage lender, CBA, differs from this view, now forecasting that the RBA will remain on hold at 3.35% until early 2027, followed by rate cuts at next year’s May and August monetary policy meetings:
However, in arriving at its central forecast, CBA acknowledges that “there is a degree of uncertainty around the cash rate outlook” and that “the risks to this outlook are tilted towards the cash rate remaining higher for longer”.
I believe the CBA is correct in the view that we have likely seen the end of rate hikes. While inflation remains above the 2% to 3% target band, the RBA would likely take solace in the fact that the housing market has cooled dramatically, with values now trending lower in the national capital cities.
The nation’s unemployment rate is also rising faster than the RBA had forecast. At the same time, the economy looks to be entering another per capita recession following a 0.1% decline in per capita GDP in the March quarter.
Therefore, the data suggest that the economy is weaker than the RBA expected and that monetary policy is already tight.
For months, I have argued that the RBA would tighten too much this year and then be forced to cut next year as the economy teeters on the brink of recession.
CBA now appears to share a similar view.
