Will there be rate cuts at the end of 2023? All the evidence we have so far

At the beginning of 2022, the cash rate was sitting at an historic low of 0.10 per cent. Since May, the Reserve Bank of Australia (RBA) has raised the cash rate target a total ten times to 3.60 per cent in April 2023.

As part of his statement on this month’s decision to pause the rate hiking cycle, RBA Governor Philip Lowe asserted that the central bank “expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target".

This remark advocates that Australians should anticipate more rate hikes in 2023. But will there be any cuts?

Given that the full impact of ten consecutive cash rate hikes has yet to be felt by borrowers, the impending mortgage cliff is looming for more than 800,000 households, and the plausibility of a possible recession is swelling, it’s reasonable to speculate that there may be cuts to the cash rate before the close of 2023.

What’s the sentiment among banks and economists?

Many forecasters, along with the Big Four banks, are tipping that the RBA will continue to deliver cash rate hikes this year. In fact, just a few weeks ago, Deutsche Bank revised its long-term outlook.

“We now look for the RBA cash rate to rise to 4.1 per cent by August, with 25 basis points hikes in each of February, March, May and August,” Deutsche Bank’s Australia chief economist Phil O'Donaghoe said in a note to clients.

Shortly after the RBA handed down its February decision, the nation’s largest bank - the Commonwealth Bank of Australia (CBA) - amended its forecast, adding an extra 50 basis points to its original peak cash rate estimate of 3.35 per cent. 

“We now expect the RBA Board to raise the cash rate by a further 25 basis points at both the March and April Board meetings. This would take the cash rate to 3.85 per cent,” CBA's Head of Australian Economics Gareth Aird said.

"Two further 25 basis point interest rate hikes means the probability of a soft landing for the economy is lowered significantly. The budgets of many home borrowers will be under considerable strain over the coming year.”

One of those two predicted hikes has already come to fruition.

However, CBA is upholding its position that the RBA will deliver a series of rate cuts during the fourth quarter of this year and through the first half of next year, as a means of avoiding a sharp downturn.

Will the proposition of a recession spur interest rate cuts?

Australia managed to avoid recession for more than 28 years, including through the Global Financial Crisis of 2007-2008. This represented the longest period of growth without a recession for a developed country since the System of National Accounts was established in 1953. Then, the COVID-19 pandemic hit and the economy entered a recession.

If GDP exhibits two consecutive quarters of negative growth, many experts will consider this a recession. However, for other commentators a more prolonged period of stagnant growth, paired with a jump in unemployment, may need to occur before they agree. Whatever the case, it’s clear we’re in for a period of economic hardship and weak growth.

What may be the more important question isn't whether Australia will enter into a recession but to what extent will this forecast slump affect consumer confidence and household debt, and for how long? Will the effects be mild and tolerable or harsh and drawn-out? And what will the RBA do to ease the pain for struggling borrowers?

If a recession does transpire it may lead to interest rates cuts, which would provide some relief to mortgage holders. However, it may also result in higher unemployment and a greater potential for borrowers to default on repayments.

Supply chain issues driving inflation

RateCity chief executive Paul Marshall suggested that central banks tend to focus on managing the demand side of inflation because supply is influenced by a range of international political factors that are largely outside their control.

“Using their authority, they speed up or slow down the economy by adjusting various financial levers - the main one being interest rates. Hiking up interest rates works to lower inflation because it chokes off demand,” Marshall said.

However, he noted that supply chain and geographical issues may perhaps be a bigger problem than the RBA is letting on, and oversimplifying the situation doesn’t help anyone. 

“If this is the major driver of Australia’s high inflation, it might be time for the RBA to take a break from raising interest rates and instead encourage governments and businesses to focus on solving the root problems causing disrupting supply,” he said.

Previewing the forthcoming forecasts to be released later this week, the RBA said it expected inflation to recede from its current peak of 7.8 per cent to 4.74 per cent by the end of  2023, and to around 3 per cent by mid-2025.

When will the RBA cut interest rates?

The RBA asserts that “there is a lag between changes to monetary policy and its effect on economic activity and inflation because households and businesses take time to adjust their behaviour”.

Interest rate hikes can take months to be fully priced into variable rate home loans. It’s at the behest of the banks to pass on increases in the cash rate to customers. A slew of borrowers who took out fixed-rate home loans during the COVID pandemic are beginning to come off their ultra low fixed terms, generating masses of refinancing requests.

Some estimates suggest that it takes between one and two years for monetary policy to have its maximum effect. This is why we see banks and government agencies offer up long run inflation forecasts. However, any structural changes to the economy or varying budgetary conditions can spawn uncertainty in how prices might move.

Most of the big four banks forecast another 25 basis points hike to the cash rate in April 2023. Westpac, NAB and ANZ expect the cash rate to peak at 4.10% by May 2023.

Big four banks' cash rate forecasts:

• CBA: 3.85% by April 2023, then dropping to 2.85% by December 2023
• Westpac: 4.10% by May 2023, then dropping to 2.35% by December 2025
• NAB: 4.10% by May 2023, then dropping to 3.10% by May 2024
• ANZ: 4.10% by May 2023, then dropping to 3.85% by November 2024

In his second economic update for 2023, Bendigo and Adelaide Bank chief economist David Robertson suggests that a pause in rate hikes is likely in April, or at the latest by May, but interest rate cuts won't be seen for some time yet.

“As we mentioned last month, we expect a plateau in rates by May, but for the RBA to still maintain a tightening bias.
Rate cuts are unlikely to be seen until core inflation is back below 3%, which may not occur until late 2024,” he said.

A snap poll of economists by the AFR last month implied it was unlikely that the RBA would deliver any relief for mortgage holders before the year’s out. 18 of the 24 respondents (75 per cent) did not forecast any reduction in the cash rate through 2023.

Although there are some financial analysts and banks anticipating cuts this year, it would be sensible to remain wary of the RBA’s future moves. It wouldn’t be the first time that Governor Lowe has had to eat his words. If inflation lingers or worsens into the second half of the year, this may inspire additional rate rises or perhaps a lengthier-than-expected period of rates on hold. For now, the RBA seems intent on increasing interest rates.

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