What to expect from the RBA meeting in August 2022

With inflation high and unemployment low, the Reserve Bank of Australia (RBA) is being widely tipped to be planning another cash rate hike at its August 2022 meeting. But how much are rates likely to rise, and how long could this last? 

Here’s what the RBA and some of Australia’s big banks have to say about it:

RBA 

According to the most recent Consumer Price Index (CPI) figures from the Australian Bureau of Statistics (ABS), annual inflation rose to 6.1 per cent in the June 2022 quarter - the highest annual CPI rate recorded since June 2001, when annual inflation also reached 6.1%.

Speaking at the Australian Strategic Business Forum 2022 in Melbourne earlier in July, RBA governor, Philip Lowe, said that the RBA’s goal is to return inflation to a target of 2 – 3 per cent, “in a way in which the economy continues to grow and unemployment remains low.”

“So I think, in the next little while, we're going to need to have further increases in interest rates. A cash rate of 1.35 per cent in an economy with inflation that's soon to be six and perhaps seven per cent and an unemployment rate of 3½ per cent. You know, we need higher interest rates. That level of interest rate is too low, and we're going through a process now of steadily increasing interest rates, and there's more of that to come. We've got to move away from these very low levels of interest rates we had during the emergency. We took out a lot of insurance, we have to remove the insurance, and there's more work for us to do there, and we'll be guided by the outlook for inflation.”

ANZ 

ANZ head of Australian economics, David Plank, is not only predicting another double rate hike of 50 basis points in August 2022, but identical 50-point rate hikes in September, October and November.

This would catapult the national cash rate from its current 1.35 per cent to 3.35 per cent, where it may stay through 2023 and 2024. ANZ’s forecasts suggest that these rate rises could see house prices fall by more than the 15 per cent to the end of 2023.

Plus, there’s still room for the cash rate to rise even higher before the end of this year:

“ANZ Research does think moves of more than 50 basis points in August or September are a very real possibility although not the central case. This could be a move of 75 basis points or even 65 basis points if the RBA wanted to “round” the cash rate target to 0.25 per cent.”

However, in something of a silver lining, a cash rate of 3.35 per cent may mean that household interest payments as a percentage of household income peak below the level reached in 2008, and wage growth is also expected to accelerate over 2022 and 2023.

Commonwealth Bank

Commonwealth Bank head of Australian economics, Gareth Aird, said following the release of the ABS CPI data:

“There are no two ways about it – inflation is red hot in Australia right now, as it is in many parts of the world, and the RBA will respond by raising the cash rate again at the August Board meeting next week.  Our central scenario for the RBA to raise the cash rate by 50bp at the August Board meeting is unchanged.”

Mr Aird added there’s also a risk of a higher rate hike of between 50 and 75 basis points, though that risk is considered low. He also added that the RBA’s recent rate hikes “had no impact” on the June quarter inflation outcome, and that the expected future rate hikes are “unlikely to shift the inflation needle over the September quarter.”

Commonwealth Bank's most recent forecasts were for 50-point cash rate hikes in August and September 2022, followed by a 25-point hike in November 2022, bringing the cash rate to 2.60 per cent. 

NAB

NAB group chief economist, Alan Oster, is forecasting that Australia’s cash rate will reach 2.85 per cent by the end of 2022, “which we consider to be around neutral if not mildly restrictive.” This is expected to take the place in the form of two 50-point hikes in August and September, before slowing to two 25 point hikes in October and November to assess the impact of rate increases.

Regarding August 2022, NAB also acknowledges that a 75-point hike is possible, and that it’s unlikely that a 25-point increase will be given any serious consideration.

“While we formally expect a pause in rate hikes once the RBA has lifted rates to a level it considers is consistent with inflation returning to within their target, the current high level of uncertainty around any point forecast and estimates of the neutral interest rate, means the RBA will be sensitive to material incoming data surprises as well as overseas developments.”

Westpac

Westpac chief economist, Bill Evans, says the bank is now forecasting that the RBA cash rate will max out at 3.35 per cent, rather than its previous prediction of 2.6 per cent. To reach this rate, Westpac expects the RBA to make two 50 point rate rises in August and September, followed by 25 point rises at every meeting from October 2022 to February 2023 (the RBA does not meet in January).

“Higher interest rates will also add pressure to the housing market where a price correction is already underway. Prices are now expected to decline 4% over calendar 2022 and 10% in calendar 2023, with a ‘peak to trough’ fall of over 15%.”

With economic growth expected to slow to 1 per cent in 2023 and the unemployment to rise from 3 per cent to 4.4 per cent in 2023, Westpac further expects that the RBA will cut the cash rate by 100 basis points in 2024.

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