Interest rates: Huge forecast ahead of Reserve Bank of Australia meeting

Economists and experts expect the Reserve Bank to leave the cash rate unchanged on Tuesday. However, borrowers have been advised to prepare for possible future increases. The board is unlikely to rule out future increases.

Gareth Aird, an economist at the Commonwealth Bank and head of the Australian economy, had predicted that rates would remain unchanged on Tuesday. In his statement on the decision, he was likely to say that the board was “not yet making any pros or cons” of future moves.

If the figures are correct, the RBA board will keep interest rates at their current 12-year high of 4.35 percent, hoping to bring inflation back to its targeted range of 2-3 percent, expected to be reached by mid-2026.

“We expect the cash rate to remain unchanged and consider the probability of a different outcome trivial,” he wrote.

‘We expect the RBA Governor (Michele Bullock) to stick to the same script that has been used at every press conference in 2024. Namely, that the board remains alert to potential upside risks to inflation, while recognising that GDP growth is weak and the outlook uncertain.’

Households and economists breathed a sigh of relief on Wednesday after the consumer price index rose from 3.6 percent to 3.8 percent for the June quarter figures.

While the increase was still above the RBA’s target, it was in line with the Board’s forecasts.

However, the all-important underlying inflation figure, or the trimmed average that strips out larger price movements and forecasts about core inflation, fell from 4 percent to 3.9 percent.

Interest rates are expected to remain unchanged, much to the relief of mortgage holders

RBA Governor Michele Bullock expected to leave interest rates unchanged on Tuesday

Next Tuesday’s cash rate announcement coincides with the release of the August quarterly monetary policy statements, which take into account the federal government’s $300 energy cut.

CommBank’s Stephen Wu predicts that the impact of the cuts could lead to the RBA revising inflation figures “downwards”, but the forecast for the trimmed average CPI is likely to remain the same.

‘More specifically, we expect the line from the June statement to be maintained that ‘the path of interest rates that would best ensure that inflation returns to the target level within a reasonable time frame remains uncertain and the administration is holding off on making any positive or negative statements,’ he wrote.

“While the administration will have welcomed the latest inflation figures, there is no reason to deviate from the recent script. It is indeed too early to change tone.”

The RBA is not expected to rule out further rate hikes as it seeks to curb inflation to a target of 2-3 percent.

While some economists have predicted rates could be cut “before Christmas”, financial comparison site RateCity urged borrowers to prepare for a possible future rise as inflation remains stubborn.

A 25 basis point increase in the cash rate would result in someone with a $500,000 mortgage making an additional $75 monthly payment, increasing payments by a total of $1,285 compared to the cash rate increase in May 2022.

Calculations for a $750,000 mortgage mean that payments would increase by $112, or a total of $1,928, because interest rates have risen.

“(Wednesday’s inflation update) still fits within the RBA’s plan to return inflation to target levels by mid-2026, giving the bank more time to continue with its current plan,” said Sally Tindall, research director at RateCity.com.au.

‘But the clock is ticking for the RBA. If inflation in Australia does not come down again soon, or worse, continues to move in the wrong direction, the Board will have to intervene.’

However, she said the likely state of affairs will give borrowers the opportunity to prepare for a possible increase.

“If you haven’t already accounted for the extra dollars from your phase three tax cuts, set that money aside for safekeeping,” she added.

“If that money is already closing a hole in your budget, now is the time to look at other ways to ease the pressure.”

In preparation for Tuesday’s announcement, Finance Minister Jim Chalmers has decided to stop making forecasts.

While he said inflation figures were “encouraging”, cost of living pressures remained high.

“On Tuesday afternoon we will know where they (the RBA) have landed and why. I have respect for them and I am not making any predictions or trying to pre-empt them or position them,” he told the Sunday Telegraph.

‘There were some encouraging numbers on Wednesday and we have made good progress since the election, but I recognise that inflation is still too stubborn and that is why we were not overly enthusiastic when the numbers came out.

However, Shadow Chancellor of the Exchequer Angus Taylor blamed the government for fuelling inflation with the “extra spending of $315 billion”.

“The RBA has one tool: monetary policy. The government has to play its part, but Labor has failed to do so,” he said.

‘Australia is at the bottom of the list when it comes to tackling inflation – we are the only G10 country where inflation has increased compared to December. This is an indictment of the Albanian Labor government.’