The Reserve Bank of Australia (RBA) is set to cap off its monetary policy tightening cycle with one last 25 bps hike in August, according to senior economists from the Commonwealth Bank of Australia (CBA) and HSBC Australia.
This would take the official cash rate to a peak of 4.35 per cent — a cumulative 425 bps in rate rises since the cycle commenced in May 2022.
The RBA opted to keep rates on hold in July, which according to HSBC chief economist Paul Bloxham, reflects the board’s “narrow path” strategy — returning inflation to the 2–3 per cent target range without tipping the economy into recession.
“After hiking substantially and continuously until March (by 350 bp), pausing in April and then adding two more additional (surprise) hikes just in the past two months (another 50 bp), there is, as the RBA noted today, ‘considerable uncertainty surrounding the economic outlook’ and the likely impact of the central bank’s tightening,” he observed.
“Most of the economic indicators that have been published recently and have attracted market focus — like employment and retail sales — were for May, which predates the June tightening and where little of the effects of the May tightening are likely to have shown through either.
“In addition, as always, the effects of monetary policy are lagged and the largest part of the fixed rate mortgage reset (the so-called, ‘fixed rate mortgage cliff’) to higher variable rates has only just got going in June.”
The Commonwealth government remains confident the Australian economy would avoid a recession, despite the interest rate shock.
Finance Minister Katy Gallagher backed Treasury and the RBA’s expectations of continued GDP growth, albeit modest, in the short-medium term.
She references a line in the RBA’s post-meeting monetary policy statement, in which the central bank noted it is “still expecting the economy to grow as inflation returns to the 2–3 per cent target range”.
However, the minister acknowledged cost of living pressures and the overall drain on household budgets.
“We accept people are doing tough out there. We accept that growth is slowing, economic growth is slowing, that is what was expected essentially as we try to deal with this inflation challenge,” she said.
CBA and AMP flagged a 50 per cent chance of a recession as a result of the protracted battle against inflation.
However, AMP has joined a number of peers — including ANZ, NAB, and Westpac — in projecting two additional 25 bps hikes from the RBA for a terminal cash rate of 4.6 per cent.
According to ANZ Research, RBA could replicate its monetary policy strategy in the June quarter.
“With the April pause followed by back‑to‑back rate hikes in May and June, we are reluctant to back away from our call of a 4.6 per cent peak just yet,” the group noted.
“When and whether we get to that level is a little more uncertain in the wake of [the] pause.”
