Aus rates may have peaked

A softening in forward-looking labour market indicators, good news on global inflation and increasing anecdotal evidence recent hikes are impacting consumer behaviour all indicate interest rates in Australia may have peaked.

While it is possible there could be a hike in August, ANZ Research now expects the Reserve Bank of Australia to leave the official cash rate on hold for an extended period at 4.1 per cent.

Looking into 2024, ANZ Research’s base case remains an extended pause before easing toward the very end of that year, driven by both a higher unemployment rate and lower inflation.

That isn’t the only scenario, however. It’s possible (but less likely) a moderation in inflation and a solid labour market could boost real household incomes and spending. Combined with signs inflation is stuck above the target, the RBA could look to tighten again in 2024.

That risk, however, is ultimately more a question for next year and not one the RBA is likely to try to address now, particularly given the amount of tightening yet to work its way through the economy.

Downshift

The RBA has now paused twice in the past four months. This downshift in action increasingly reflects the balance of forward-looking data. While the labour market remains tight, consumer unemployment expectations, business forward orders and job ads collectively suggest a modest uptrend in unemployment over the coming months.

Anecdotal evidence (and ANZ’s own spending data) also suggests recent rate hikes have had an impact on consumer behaviour.

Upcoming second-quarter consumer price index data should be sufficiently consistent with the RBA forecasts to not sway the August decision.

While the RBA will likely lift its wages forecasts in the coming August Statement on Monetary Policy, it may see any upside risk for consumer price inflation as having already been mitigated by the rate hike in June. Whether a single 25-basis-point rate hike is sufficient to offset that risk is the question. While individual rate hikes do matter, especially for mortgage holders, the impact of a single 25-basis-point move on an entire economy over a 12 to 18-month period is quite modest. By the same token one can also argue the reverse. Namely, if the RBA felt that its action to date had not dealt with that risk, then why not move in July?

On balance, ANZ Research expects an extended pause at the current cash rate of 4.1 per cent.

Adam Boyton is Head of Australian Economics at ANZ

This is an edited version of the ANZ Research report “Change in RBA call – an extended pause at 4.1%”, published July 14, 2023