What to expect from the RBA in August 2023

Economists from some of Australia’s leading banks have been forecasting for some time now that another cash rate hike is due to arrive at the August 2023 meeting of the Reserve Bank of Australia (RBA). But as the big date approaches, is a hike still on the cards?

RBA

The RBA kept the cash rate on hold in July 2023, citing (among other factors) concerns around uncertainty surrounding the economic outlook. However, in the minutes of that meeting, the RBA Board kept its options open, stating that “some further tightening of monetary policy may be required to bring inflation back to target within a reasonable timeframe, but that this depended on how the economy and inflation evolve.”

Additionally, outgoing RBA governor Philip Lowe said at an appearance at the Economic Society of Australia (Qld) Business Lunch that he was confident that the higher interest rates are working:

“Talk to any retailer at the moment; they say, ‘Spending is slowing; people are trading down to cheaper items and, in some cases, smaller baskets.’ So, consumption growth is weak, and that’s largely because of what’s going on with monetary policy but also the decline in real incomes from higher inflation.”

The most recently released quarterly Consumer Price Indicator (CPI) figures from the Australian Bureau of Statistics (ABS) show that annual inflation increased 6.0% in the twelve months to June 2023. This represents a 1.0% decrease in the pace of annual inflation from March's 7.0% rise, below many economists’ forecasts, including the RBA’s.

Despite its easing, inflation is still above the RBA’s preferred target range, especially in areas such as rents, travel, and other services. The central bank could still choose to encourage inflation downward faster with one or more further rate hikes. 

Federal Government

Following the release of the CPI figures, Australia’s Federal Treasurer, Jim Chalmers, said that it was “pleasing” to see inflation moderate, though he would like to see it moderate faster to help ease pressure on Australian household budgets.

In a recent interview, the Treasurer declined to “pre-empt” the RBA’s future decisions around interest rates, specifically in relation to strong employment figures, stating that the RBA will “weigh up a whole range of factors” when they next look at the cash rate.

“They’ll weigh up global uncertainty, some of the other data has been a bit softer - the National Accounts for March were certainly relatively flat. And so they'll have the opportunity to consider the jobs market but also in the context of all of these other indicators that show our economy is slowing but our labour market - our jobs market - is holding up really well.”

ANZ - hold

ANZ Research had previously forecast a rate hike in July 2023, and again in August, to bring the cash rate to a peak of 4.6%. However, following the pause at the RBA’s July 2023 meeting, ANZ has changed its tune and now believes that rates should remain on hold in August 2023.

ANZ head of Australian economics, Adam Boynton, said that while it was possible the RBA could choose to hike the cash rate in August 2023, ANZ’s base case was now that the RBA will leave the cash rate on hold until the end of 2024, when it is expected to ease due to higher unemployment 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.”

Following the release of the latest quarterly CPI results, ANZ senior economist, Adelaide Timbrell, said that the RBA would “likely find comfort“ in the figures, which came in lower than the RBA’s forecasts.

“The RBA recently highlighted that the cash rate is “clearly restrictive” and that it remained to be seen if more cash rate increases are required. The sharp drops in headline and core CPI and in non-tradables and services inflation, the latter two both printing 0.8% q/q in Q2, highlight that a 4.1% cash rate may be restrictive enough to bring inflation down.”

Commonwealth Bank - hike

Prior to the release of CPI figures from the ABS, Commonwealth Bank forecast that inflation would ease further, but not enough for the RBA to pause the cash rate.

“Given the remarkable resilience of the labour market, and the overseas experience of sticky core and services inflation, the RBA’s path of least regret may well be to deliver another rate hike.  A material miss on inflation, however, could cloud the decision.”

CommBank added that there is clear evidence that the previous 400 points of rate hikes are working to slow the economy and contain inflationary pressures, with scheduled mortgage repayments in May increasing to around their historical peak of 9.4% of household disposable income.

Following the release of CPI, Commonwealth Bank economists said that while the figures are softer than expected, they are not a “material undershoot” that would have ruled out a hike in August 2023. With this in mind, Commonwealth Bank expects the RBA to hike the cash rate one final time in August 2023 to 4.35%, acknowledging that it is "another finely balanced decision." 

NAB - hold

Earlier in July, NAB economists forecast that the RBA would push the cash rate as high as 4.6% in 2023, though there was a chance that it may choose to keep the cash rate on hold in August.

“With the pace of hikes slowing, the RBA Board clearly feels that rates are close to being restrictive enough, and there is a chance they remain on pause at 4.1%. However, in our view the risks around inflation will ultimately push them to raise rates slightly further.”

But because of the lower-than-expected CPI outcome in the June 2023 quarter, NAB now expects the RBA board to leave rates unchanged in August 2023. Other factors that could contribute to a pause include the RBA awaiting more information on the evolution of the economy and inflation, and uncertainties over the lags in previous policy increases, though high services inflation means continued risks of higher rates over coming months.

Westpac - hike

In the lead-up to the release of CPI figures from the ABS, Westpac economists forecast that the report would show inflation to be “materially below peak but still a long way from target.”

“With the labour market tight and unease over inflation expectations lingering, we believe hikes in August and September to a cash rate peak of 4.60% and a length pause to May 2024 is justified.”

Following the release of the quarterly inflation data from the ABS, Westpac now believes that while the RBA will hike the cash rate in August 2023, a follow-up hike in Septermber may no longer be required, and that "maintenance of the tightening bias beyond August should be sufficient."

"A combination of one last hike in August complemented with the ongoing ‘soft’ tightening bias seems to be the best approach to a difficult challenge."

To help you stay up to date with the latest changes to the national cash rate, as well as any adjustments to interest rates for home loans and savings accounts that follow, be sure to visit the RateCity RBA Rate Tracker hub.

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