Majors tweak terminal rate forecasts
Following the Reserve Bank of Australia’s decision to hold the official cash rate, the major banks have offered updates to their terminal cash rate forecasts.
The Reserve Bank of Australia (RBA) broke a streak of 10 consecutive rate hikes that has seen the official cash rate rise by a cumulative 350 bps from the historical low of 0.1 per cent to the current 3.60 per cent.
NAB’s latest Monetary Policy Update stated the major bank now expects the Reserve Bank of Australia (RBA) to hold the cash rate at 3.60 per cent, dropping from the previously expected 3.85 per cent for the terminal cash rate.
According to NAB, this now means that the cash rate has hit its peak in this cycle and it expects the RBA to remain to hold until the first half of 2024 before lowering the cash rate back to 3.1 per cent.
NAB Group chief economist Alan Oster said the RBA justified the hold on the “need for more time to assess the ongoing impact of previous rate rises and the evolution of the outlook for the domestic and global economies.”
“In our view, waiting for more than a few months would see the RBA overrun by slowing consumption data and a deteriorating labour market outlook meaning the RBA will remain on hold as inflation moderates,” Mr Oster said.
However, Mr Oster noted that a rate rise in May or June “remains a real possibility” due to the RBA being very “data dependent”.
“… The key risk to our view in the near term is that the RBA reads inflation or wage growth as sufficient to do more before the full impact of rates fully flows through — which would see a slightly higher peak of 3.85 per cent,” Mr Oster said.
ANZ have also reassessed its outlook for the cash rate following the RBA’s decision. The major bank now expects the RBA to keep the cash rate unchanged until August 2023, expecting a 25 basis point hike to a 3.85 per cent peak.
ANZ previously forecasted the terminal cash rate to reach 4.1 per cent after forecasting two 25 basis point rises in both April and May.
The major bank noted that it still expects the central bank to “keep rates higher for longer”, with the first rate cut not occurring until November 2024.
Westpac and the Commonwealth Bank of Australia (CBA) have held firm in their expectation of a further 25-bp rise in the May board meeting to bring the terminal cash rate to 3.85 per cent.
Westpac chief economist Bill Evans said the major bank continues to expect the RBA to hold rates steady over the second half of 2023 before lowering the official cash rate by 1.0 per cent during 2024, to be at 2.85 per cent by the end of that year.
CBA’s Monthly Insights report noted the RBA’s shift in rhetoric, with governor Philip Lowe signalling that “further tightening of monetary policy may be needed”, downgrading from the previous language form “will be needed”.
