The Reserve Bank (RBA) is expected to hand down another rate hike of 25 basis points (bps) on Tuesday, taking interest rates to their highest level in over a decade.
While a number of economists believe that the RBA will give consideration to a ‘Santa pause’ at its final policy meeting of the year, an increase of 25 bps is still seen as the most likely scenario.
If accurate, this would be the RBA’s eighth consecutive rate hike and would lift the cash rate to 3.10 per cent after a combined 300 bps of tightening, marking the first time since November 2012 that rates have reached above 3 per cent.
According to Commonwealth Bank’s (CBA) head of Australian economics, Gareth Aird, the likelihood that rates could stay unchanged this month is low and sits at around 20 per cent.
However, he also pointed out that the notion of pausing has appeared in every piece of communication from the central bank since the beginning of November.
“The RBA is still flying blind to a degree given the last few rate hikes have not yet hit home borrowers from a cash flow perspective,” he said.
“There is also a very big expiry of fixed rate home loans over the next year which means monetary policy is operating with a greater than usual lag.”
Despite this, CBA maintains that the RBA board will most likely hike the cash rate by 25 bps after indicating that it “expects to increase interest rates further over the period ahead”.
Mr Aird suggested that this forward guidance will likely change at the December meeting. Namely, instead of “expects to increase”, Mr Aird believes the RBA governor, Philip Lowe, will now opt for “likely” or “willing to” increase interest rates further.
“Both changes would still see the RBA retain a tightening bias. But they would indicate that further policy tightening in 2023 is not locked in,” he said.
“And they would set the RBA up for a potential pause in the tightening cycle in February 2023 while also giving them full flexibility to raise the cash rate again, should they wish to do that.”
CBA has predicted that 3.10 per cent will be the terminal cash rate but has acknowledged that there is a risk that rates could climb further to 3.35.
Despite weak retail sales in October and the unexpected inflation slowdown in October, economists at ANZ also see the RBA keeping its foot on the accelerator this month.
“We do think a December pause will be considered, but with the RBA not meeting again until February and the recent wages and employment data being robust, we expect the cash rate target to be lifted 25 bps to 3.1 per cent,” the team said.
Westpac has indicated that it “confidently” expects an increase of 25 bps in both December and February.
“A further 25 basis point adjustment at the December meeting is likely to have been firmly on the board’s future agenda when it last met on 1 November,” said chief economist Bill Evans.
“The added attraction of moving in December is that the next meeting will not be until 7 February, providing ample opportunity to assess the cumulative impact of the normalisation process.”
Meanwhile, NAB too expects a hike of 25 bps.
“High inflation, a tight labour market, and accelerating inflation mean it is too early for the RBA to pause, even as they prioritise keeping the economy on an ‘even keel’,” said NAB economist Taylor Nugent.
“As for the post-meeting statement, this could equivocate a little further on the guidance that the board expects further interest rate hikes in the period ahead.”
In his forecast for the upcoming rate decision, AMP’s chief economist, Dr Shane Oliver, also entertained the possibility of a pause but said that a 25 bp hike was more likely.
In particular, Dr Oliver highlighted the risks of a price-wages spiral amid a very tight labour market and the passage of industrial relations laws permitting multi-employer bargaining.
“But the increasing evidence of a peak in inflation pressures and a slowdown in the economy adds to our confidence that we are getting near the peak in the cash rate and the debate on Tuesday at the RBA Board meeting is likely to be between a pause or a 0.25 per cent hike and not between a 0.25 per cent hike or a 0.5 per cent hike,” he added.
“Maybe the RBA should just hike by 0.15 per cent taking the cash rate to a neat 3 per cent.”
A peak of 3.1 per cent also remained the base case for AMP, but with the risk of a peak of 3.35 per cent in reflection of the rising risk of excessive wage growth.
“But either way, by early next year, there should be enough evidence indicating growth is slowing sharply and inflation is peaking, enabling the RBA to go on hold,” said Dr Oliver.
“Consistent with this, we expect the RBA to soften its forward guidance to allow for further tightening as well as a pause going forward.”
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
