Majors split on RBA August cash rate forecast

Updated: 28 July 2023, 1:30 p.m.

The latest inflation reading could spell another pause for the Reserve Bank of Australia (RBA), which would leave the cash rate at 4.10% in August.

Two of the big four banks are expecting the RBA to hold the cash rate, following the lower-than-expected Consumer Price Index reading for June 2023 quarter at 6.0%. Westpac has yet to release its updated forecast, but it does agree that the latest inflation reading will weigh heavily on the RBA’s decision in August.

Here are the insights of economists from each of the major banks:

ANZ – Hold at 4.10%

ANZ senior economist Adelaide Timbrell said the RBA will likely find comfort in the latest inflation reading.

“The RBA recently highlighted that the cash rate is ‘clearly restrictive’ and that it remained to be seen if more cash rate increases are required,” she said.

Ms Timbrell said the sharp drops in headline and core CPI and in non-tradables and services inflation seem to highlight that a 4.1% cash rate may be restrictive enough to bring inflation down.

“This is particularly the case given monetary policy operates with a considerable lag,” she said.

CommBank – 25bps hike to 4.35%

CommBank is the only major expecting the RBA to roll out a hike in August, which will bring the cash rate to 4.35%.

CommBank senior economist Belinda Allen said while the headline CPI rose at a lower-than-expected rate during the quarter, the services inflation increased at its highest annual rate since 2001.

“A slightly softer June quarter inflation, but still resilient labour market, high services inflation, a recovering housing market and concerns around productivity growth will all feature in the policy deliberation,” she said.

“The challenge for the RBA is a mixed set of data. The labour market report for June was strong — employment growth is running above expectations and the unemployment rate was only 3.5% in May and June.

Ms Allen said the recent quarterly inflation figures and the labour market data will be viewed in the context of how it influences the RBA’s inflation and labour market forecasts as well as the perceived risks around those point forecasts.

“The lower-than-expected June quarter inflation figures raises the possibility that the RBA could downgrade their inflation forecasts, or characterise those risks as skewed to the downside,” she said.

“Given the uncertainty around the path of services and consumer durables inflation the path of least regret, we expect, is for the RBA is to deliver one final rate hike in August, taking the cash rate to 4.35%.”

NAB – Hold at 4.10%

NAB chief economist Ivan Colhoun said while the latest CPI reading could be used to justify another pause for the RBA, there are concerns in terms of the services inflation, which remains high.

“It’s likely to be another close call — we’re favouring the RBA taking the win provided by the first notable core inflation reading below forecast arguably since Q2 2021 in a hawkish pause, while awaiting further information on the evolution of the economy and inflation,” he said.  

“While the news on goods prices is very welcome, developments in services are less welcome but not unexpected, though we tend to put this down more to the sequence of inflation shocks hitting global economies through the pandemic period – and in a lagged sense in Australia for various reasons - rather than to true sticky inflation as in past economic cycles.”

Mr Colhoun said the Q3 monthly services inflation prints are likely to be challenging for the RBA given the impact on the economy of increases in minimum wage, energy prices, insurance rates, telcos and postage fees.

“The inflation picture suggests the risk remains of some further tightening in Australia in the next few months but that at the same time we are close to the peak in interest rates,” he said.

Westpac – 25bps rate hike to 4.35%

Westpac senior economist Justin Smirk said the latest reading is further confirmation that the pace of inflation is moderating in a meaningful way.

“In a nutshell, as we are seeing overseas, we are seeing the momentum of inflation shifting very quickly. There’s stickiness around services inflation but it is not as strong as it could have been, while goods prices are moderating quickly than anticipated,” he said.

“It all suggests there is a good chance that inflation will come to the end of this year somewhat lower than what the RBA is currently expecting.”

Westpac chief economist Bill Evans said the latest CPI reading emphasizes the persistent nature of services inflation, while information concerning the labor market and productivity raises uncertainties about the ability to realistically lower the inflation trajectory and achieve the inflation target earlier.

"Most importantly it needs to reach the mid-point of the target range by the extended forecast end-point of December 2025. If, as we consider likely, the RBA’s revised forecasts show little progress in this regard then the Board should take out more ‘insurance’ with an additional 25bp rate hike at its August meeting," he said."

"A combination of one last hike in August complemented with the ongoing ‘soft’ tightening bias seems to be the best approach to a difficult challenge," he said.

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