Economists predict the Reserve Bank of Australia (RBA) will increase interest rates once more before transitioning to an easing policy next year, according to a recent poll. The RBA is expected to keep rates unchanged for the next two meetings and then raise rates in November, pushing the cash rate to a 12-year high of 4.35%. However, ANZ, Commonwealth Bank of Australia, and Westpac disagree, anticipating the terminal rate to be 4.1%.
Following the rate hike, economists forecast the RBA will shift to an easing cycle in the second quarter of 2024 due to rising unemployment and slower economic growth. The RBA’s Quarterly Statement on Monetary Policy (SOMP) revealed key forecasts remaining mostly unchanged, indicating the central bank’s confidence in economic data meeting expectations. This suggests that data will play a crucial role in future monetary policy decisions.
Compared to other central banks, the RBA has been more cautious in its tightening cycle, aiming to bring inflation back to target while achieving a smooth economic transition. Australia’s borrowing costs have risen by 4 percentage points thus far, lower than the 5.25 percentage points seen by the Federal Reserve and neighboring New Zealand.
Within the SOMP, the RBA mentioned alternatives, stating that countries with persistently higher inflation have increased their policy rates further. This raises questions about whether it is the policy settings in other comparable countries that are too high, or if Australia’s settings are too low. RBC Australia Chief Economist Su Lin Ong highlighted these implications and called for a reassessment of global policy settings.
The RBA’s quarterly update maintained its tightening bias, projecting a rise in the cash rate to 4.25% by the end of the year. The central bank also warned of the entrenched risk of rising inflation expectations, noting that a tight labor market could lead to substantial wage and price increases.
RBA estimates indicate that headline inflation will return to the target range of 2-3% by the end of 2025. However, with interest rates dampening economic activity, growth is expected to reach a low of 0.9% by year-end, and unemployment is projected to rise to approximately 4.5% by the end of next year.
Due to this economic weakness, three out of 18 economists are predicting rate cuts as early as the first quarter of 2024, with six expecting cuts to begin in the three months leading up to June. Commonwealth Bank of Australia predicts that interest rates will remain at 3.1%, a “neutral” level, until the end of 2024.