The RBA cash rate reaches 1.85%

The Reserve Bank of Australia (RBA) raised the cash rate from 1.35% to 1.85% at the August meeting, which was consistent with market expectations. We maintain our view that market pricing of the cash rate being above 3% at the end of the year appears excessive and think that the RBA will likely pause rate rises around 2.5%. 

The RBA are set to release their updated forecasts on Friday, with the statement noting that they expect inflation to reach around 7.75% sometime over the remainder of 2022 before declining to around 3% in 2024. Looking at the labour market, the RBA anticipate that the unemployment rate will edge up from 3.5% to around 4% at the end of 2024, as the pace of economic growth slows.

We have noted in previous blogs that the health of the Australian consumer is the key concern to the RBA – and this thematic has continued in the August statement. The most recent data points have suggested the consumer is becoming more cautious, with consumer confidence continuing to decline and retail sales for the month of July coming in below expectations.

Source: Refinitiv Datastream, 1st August 2022

One of the important additions to the August statement was the comment that there is not a ‘pre-set’ path to policy moves in the future. Whilst subtle, we think this indicates that the pace of hikes is more likely to be measured in the future. It’s important to note that whilst interest rates are still historically low, the combined tightening of policy to date is now 1.75%, which is the largest six-month increase since 1994.

We believe that the RBA is likely to keep raising rates towards their estimate of neutral (where monetary policy is no longer accommodative) of 2.5% but taking on a slower pace than the last couple of months. At 2.5%, it may be likely the RBA will stop raising interest rates as we see signs that the economy is cooling down. The key watch points for the coming month will be the labour market and consumer indicators such as consumer confidence and retail sales.