BILL'S BITES: RBA set for another 50bps lift in July

The Reserve Bank of Australia’s decision to lift the cash rate by 50 basis points at its June Board meeting was a bit more than the market was expecting. 

Westpac Economics team had forecast a 40 basis point move and we were the only major bank to consistently say that a larger hike was needed than the 25 basis point increase the RBA described as “business as usual” at its May meeting. 

We believe there’s more to come. 

The RBA has clearly signalled it recognises the significant challenge of containing inflation and is prepared to act decisively.

We think the RBA will have to lift the rate by another 50 basis points in July. That would push the cash rate to 135 basis points, taking back the 75 basis points of cuts we saw in 2019 when the RBA was frustrated at the consistently low inflation prints. 

We expect a further hike in August to get the cash rate to 1.6 percent, and that’s around a level I would call “neutral”. Above that you move into contractionary territory and it’s likely the RBA will be a bit more cautious. So, we may get a pause in September and October. But following another strong inflation report in late October they will have to move again in November and December, and then again in February, to get us to what we expect will be the peak in the cycle at 2.35 per cent. 

The economy is likely to see a substantial slowdown, especially in the December quarter as the reopening effect after pandemic lockdowns and the benefit from Australia’s high savings rate starts to fade. We see 2023 as a very weak year for growth, somewhere around 2 per cent. The advantage of that is the RBA won’t need to go heavily into contractionary territory, where it could do a lot more damage to the economy.