Will they, won't they? Experts split on RBA’s July rate move

As another potential rate hike looms on 4 July, markets and economists remain divided as to whether the RBA will increase the cash rate to 4.35%.

Over the past 14 months, the RBA has continued its quest to tame high inflation, which is proving sticky, delivering 12 interest rate hikes to reach a cash rate of 4.10% - an eleven-year high.

This begs the question: does the Board have more gas in the tank to deliver another 0.25% hike tomorrow?

Predicting the RBA’s next move has become increasingly harder for markets and economists, as the arguments for and against each rate increase remain ‘finely balanced.’

The RBA has softened its language around how high interest rates will go in every post-meeting statement, with many experts predicting ‘only one to two more hikes to go till we reach the peak.’ Yet, this statement has been said for months now, pushing the finish line further and further out of reach.

Last month’s interest rate decision was expected to hold steady, but the central bank surprised by adding another 25 basis points to the official cash rate.

This forced many major bank economists to revise their predictions for the rest of the year, with many expecting rate hikes in July and August.

That said, there is a high chance a pause could be on the cards tomorrow as inflation fell to 5.6% in May, down from 6.8% the month prior.

As of 30 June, market pricing ascribes a 68% chance of a hold at tomorrow’s Board meeting.

However, three out of four major bank economists' predictions remain hawkish, with NAB, ANZ, and Westpac pencilling in a 25 basis point lift.

AMP Chief Economist Shane Oliver said the “continuing downtrend” in inflation provides breathing space for the RBA to pause its hikes on Tuesday, but believes the central bank will opt for another 0.25% increase.

“On balance we think that the RBA is likely to opt for another 0.25% hike in the week ahead given its concerns about still high underlying inflation, sticky services inflation and rising wages growth,” Mr Oliver said.

“Either way the RBA will likely retain its tightening bias and we are continuing to allow for another two more hikes taking the cash rate to 4.6% over the next few months.”

Commonwealth Bank Of Australia (ASX:CBA) - the lone wolf, RBA to hold

CommBank Senior Economist Belinda Allen said while the July Board meeting remains ‘live’ given the RBA’s tightening bias and heightened concerns over inflation risks, the major bank expects no change to the cash rate.

“The argument for a hike in July will come down to the same arguments put forward in June,” Ms Allen said.

“That is, a perceived threat of upside risks to inflation and embedding high inflation into price and wages settings regardless of the lower‑than‑expected monthly CPI.

“The recent data flow has been mixed and we think this affords the RBA some time to slow its hiking cycle, pausing in July, and wait for the usual August forecast refresh and quarterly CPI print ahead of the August meeting.”

CommBank economists predict the RBA will present one final 25 basis point rate hike in August to reach a peak of 4.35%.

ANZ Group Holdings Ltd (ASX:ANZ) - 25 basis point hike incoming

ANZ Senior Economist Adelaide Timbrell said while the recent fall in inflation is encouraging, it’s not enough for the RBA to pause.

“We still expect the RBA to raise the cash rate in July and August,” Ms Timbrell said.

“Though given the last two decisions were described by the RBA Board as ‘finely balanced,’ there is a chance the monthly CPI data could shift the RBA to a pause in July.

“This would shift the timing of our forecast peak cash rate of 4.6% but not the level of peak.”

National Australia Bank Ltd (ASX:NAB) - upwards and onwards: +0.25

NAB Economist Taylor Nugent said the major bank sees little value in the RBA pausing this month.

“We still expect the RBA to raise interest rates twice further in coming months and we see little real value from skipping July,” Mr Nugent said.

“That said June was a finely balanced decision so a delay until August would not surprise.

“However, the cumulative data this week, and the strong employment data earlier this month, strengthen the case for a hike.”

Westpac Banking Corp (ASX:WBC) - 0.25% increase on the cards

Westpac Chief Economist Bill Evans said a terminal cash rate of 4.60% is likely to be sufficient enough to achieve the central bank’s inflation objectives.

“We confirm our view that the Board will decide to lift the cash rate by 0.25% to 4.35% at the July meeting with a further 0.25% increase to follow in August,” Mr Evans said.

“With core inflation holding above 6%; the unemployment rate holding nearly 1 ppt below the NAIRU (RBA’s estimate) and the cash rate only around 1 ppt into contractionary territory, the cash rate will need to go higher.

“A second pause, to gather further information, seems unnecessary and only risks the need for the cycle to extend even further into 2023 when the prospects for damage to the economy increase substantially.”

Westpac has pushed back its first rate cut prediction, now pencilling in May 2024 instead of February.

"Will they, won't they? Experts split on RBA’s July rate move" was originally published on Savings.com.au and was republished with permission.