The ANZ bank has predicted the Reserve Bank of Australia will keep interest rates steady in an “extended pause” next month.
With news that Governor Philip Lowe will be replaced by current Deputy Governor Michele Bullock when his term expires in September, ANZ said it was possible the RBA could hike in August, but, on balance, they think an extended pause at 4.1 per cent is now most likely.
ANZ’s Head of Australian Economics Adam Boyton said the prediction reflected an assessment of the economy based on a deteriorating labour market, good news on the global inflation front and increasing evidence hikes have slowed down consumer spending.
“The RBA has now paused twice in the past four months,” Mr Boyton said.
“This downshift in RBA action also increasingly reflects the balance of forward-looking data.”
He said despite labour markets remaining tight, the data on job ads suggests the unemployment rate will creep higher in coming months, which is in line with the RBA’s forecasts.
“Anecdotal evidence also suggests the most recent rate hikes have had an impact on consumer behaviour,” he said.
Mr Boyton said wages forecasts and assumptions around productivity growth were driving the RBA’s inflation forecasts and the data suggested wages were still rising.
Governor Lowe last week said inflation risks had shifted somewhat to the “upside” and that “the Board responded to this shift in risk with a further lift in interest rates”.
Mr Boyton said the Q2 CPI number should be sufficiently consistent with the Statement on Monetary Policy forecasts to not sway the August decision.
He said that while raising the official cash rate a further 25 basis points would have an impact on mortgage holders, it would only have a very modest effect on the entire economy over a 12 to 18 month period.
Governor Lowe also mentioned that there are a number of fixed-rate loans about to be reset to higher variable rates, which will continue to impact borrowers.
Mr Boyton said on balance he expected an extended pause at the current cash rate of 4.1 per cent.
“We acknowledge the near-term uncertainty and do not entirely rule out a move in August,” he said.
“Looking into 2024 our base case remains an extended pause before easing toward the very end of the year driven by both a higher unemployment rate and confidence inflation is returning to the band.
“That isn’t the only scenario, however. It’s possible that a moderation in inflation and a solid labour market could boost real household incomes and spending.”
He said this combined with signs that inflation is stuck above the target, off the back of either persistently high wages outcomes or a weak productivity trend, could require the RBA to tighten again in 2024.
“That risk, however, is ultimately more a question for 2024 and not one we think the Bank would seek to address now,” he said.
“Particularly given the amount of tightening done to date which is yet to fully work its way through the economy.”
