Is the RBA done. Yep. Probably.
The RBA left rates on pause again last week. And so they should have.
But are we done?
And if we’re done, when is the next move down?
Well, CBA’s chief economist has answers to both of those questions:
“Yes” and “May next year.”
The market seems to think that the RBA has one more hike left in them – that’s what you can back out of bond market pricing.
But the RBA doesn’t agree. They reckon rates are on pause from here, before starting to head lower in May 2024.
This is how it charts out:
And all up, they’re predicting four rate hikes by the end of 2024.
Now rates are notoriously hard to predict, but this does capture the general flavour in markets right now.
The central idea is that inflation has peaked and will steadily (if slowly) come down back towards target from here.
This is what the RBA forecast currently looks like, and CBA reckon that’s about right.
Without inflation rising, and without any wages pressure in the system, there should be no need for the RBA to lift rates any higher.
However, having had one of the most epic rate hike cycles in history, consumers are hurting, and budgets are under pressure.
The CBA had an interesting chart here showing how rising mortgage payments (“dwelling interest””) is driving a fall in disposable income.
And with households under pressure, and consumer spending accounting for two-thirds of GDP, this should put a strong brake on economic activity into the turn of the year.
Australia should avoid recession, and the unemployment rate will rise, but not too much higher than its current record low level, and we should be ok. This is what is known as the ‘soft landing’ scenario, and CBA reckon that this has to be your central forecast.
But with inflation slain, and households under enduring pressure, the RBA should be inspired to ease up a bit in the second quarter of 2024. You don’t want to crash the economy into the ground after all.
And given where interest rates are relative to recent history, the current settings are still quite restrictive.
(We’re not talking about the 17% we saw in the 1990s, but that was a different world then.)
So the RBA will be inspired to ‘normalise’ interest rates to something closer to a more neutral level – where rates are neither and accelerator or a brake – and CBA reckon this is somewhere around 3%.
And that’s where we’ll end up at the end of the year.
Now, there’s a lot of room for error here in these forecasts, but I think it’s a good articulation of what my base-case scenario would be.
The might be risks to the outlook, but my basic working assumption would be rates on hold from here, cuts to come in the new year sometime.
I can work with that.