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A lift in the official cash rate is still expected, despite inflation showing signs of slowing.
With the Reserve Bank of Australia (RBA) due to have its July monetary policy meeting today (4 July), several commentators expect the central bank to raise the official cash rate from 4.1 per cent to 4.35 per cent.
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According to Finsure chief executive Simon Bednar, the central bank will need to raise the cash rate by 25 basis points as inflation continues to be too high.
Mr Bednar noted that inflation rose by 5.6 per cent in the 12 months to May, and that, while this was down from 6.8 per cent the month before (and well below the December peak of 8.4 per cent), it was still well above the RBA’s 2–3 per cent target range.
“Inflation is still too high as far as the RBA is concerned and consumers continue to face rising prices for a range of essentials such as food, electricity, and rent,” he said.
“Subdued productivity growth combined with a strong labour market and wages growth are other concerns for the central bank.”
Three out of four of the major banks (ANZ, NAB, and Westpac) also believe the RBA will lift interest rates to 4.35 per cent.
The ANZ Research team (Brian Martin and Daniel Hynes) confirmed that the major bank believes that the RBA is “unlikely to pause” and does not think the central bank will be swayed by the latest inflation figures.
Westpac chief economist Bill Evans stated that it “seems unnecessary” for the RBA to decide on another pause, as it “risks the need for the cycle to extend even further into 2023 when the prospects for damage to the economy increase substantially”.
The Commonwealth Bank of Australia (CBA) stands as the only major bank to predict a pause, although CBA economist Stephen Wu acknowledged that the risks of a July rate hike “are not zero” due to rent and market services inflation showing signs of “accelerating or remaining elevated”.
"Overall we expect the RBA to pause its hiking cycle in July, leaving the cash rate on hold at 4.1 per cent. But we expect the RBA to retain their forward guidance that, “further increases in interest rates may still be required, but that this would depend on how the economy and inflation evolve”. We expect the RBA to raise the cash rate by 25bp in August, to 4.35 per cent, to ensure inflation returns to the 2-3 per cent target in a timely manner," he said.
Notably, the ASX’s RBA Rate Indicator also suggests the market expects a hold in the cash rate in July.
On 3 July, the RBA Rate Indicator (based on the market determined prices in the ASX 30 Day Interbank Cash Rate Futures) showed the market had priced in an 84 per cent chance of “no change” and just a 16 per cent chance of an increase to 4.35 per cent.
The consequences of another rate hike?
Mr Bednar further stated that mortgage holders “will need help” as thousands continue to roll off fixed rates this quarter.
While fixed-rate borrowers have avoided the pinch that variable-rate borrowers endured over the past year, these borrowers could struggle to afford to repay loans when hit by mortgage rates of 6 per cent or higher, according to Mr Bednar.
“And many could become mortgage prisoners unable to refinance their home loans to a lower rate because they will not meet lenders’ serviceability tests,” Mr Bednar said.
“This is where the broker-client relationship is so important as brokers can assist customers who have been locked out of lower rates and find them a solution.”
[RELATED: More banks expect rate hike in both July and August]
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