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RBA’s rate reprieve could be short-lived

08:15am July 06 2023

The relief felt by mortgage holders after the Reserve Bank left the cash rate unchanged in July is likely to be short-lived, with Westpac economists expecting further increases in the months ahead. 

Governor Philip Lowe’s statement made it clear that more tightening may be required, and the Board will have had chance to assess the June quarter inflation report before the August decision. 

We’ll also get the RBA’s latest quarterly statement on monetary policy in August. That’s likely to show a weaker growth outlook and an upgrade to their forecast for wages growth, although how that translates to their expectations for unemployment and inflation is less clear. 

In our view, the case for more rate hikes remains strong and we think the CPI report has potential to disappoint. While we have clearly seen the peak in inflation, progress towards the RBA’s 2-3 per cent target band is likely to be slow, with services inflation in particular continuing to be sticky.

Other developments in the economy over the past month will also be giving the RBA cause for concern. 

The labour market continues to hold up much better than expected, with the unemployment rate low and jobs vacancies still running at high levels. Average wages are also growing at a robust pace.  

As we've noted in the past, there has been a distinct shift in priorities from the RBA Board onto ensuring a timely return to the inflation target, rather than on preserving the gains in the labour market emerging from the pandemic. 

As such, we see this as a one-month pause, with a further 25 basis point tightening in August and a final move in September up to a terminal rate of 4.60 per cent. From there, we see a sustained period of rates on hold, eventually giving way to rate cuts next year by around May. 

Even so, month-to-month decisions look finely balanced in coming months, and the next few meetings are well and truly live. 

Matthew is a senior economist with Westpac. His specific areas of expertise are housing markets and the Australian consumer sector. Matthew’s research has been instrumental in shaping Westpac’s views on the Australian economy, including recent calls on official interest rates. His research has provided important insights into housing market developments and the behaviours of the Australian consumer. He is the author of Westpac’s monthly Red Book report, regards as essential reading on the consumer sector. Before joining the Westpac team in 2007, Matthew held senior positions with leading economic consultancies in Australia and New Zealand.

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