Mammoth rises over as Reserve Bank grows wary

The days of jumbo Reserve Bank rate rises are over, economists say, with Tuesday’s decision to scale back the pace of policy tightening the start of a more ‘normal’ cycle.

Barrenjoey chief economist Jo Masters said the RBA’s decision to slow the pace of hikes a month earlier than expected would mean rates likely now top out at 3.1 per cent in December, rather than 3.35 per cent.

The days of jumbo Reserve Bank rate rises are over, economists say, with Tuesday’s decision to scale back the pace of policy tightening the start of a more “normal” cycle over coming months as the central bank adopts a more cautious “wait-and-see” approach.

Analysts said rates would now likely end the year at 3.1 per cent – from 2.6 per cent now – albeit with the potential for further tightening in 2023.

Jarden chief economist Carlos Cacho, who correctly predicted the RBA would deliver a quarter-of-a-percentage-point increase on Tuesday, rather than the widely anticipated half-a-percentage-point move, said the board meeting minutes would reveal a “finely balanced decision”.

“My view is the RBA weighed up that the risk of inflation being slightly higher for longer was worthwhile to avoid a significant economic slowdown,” Mr Cacho said.

“We’ll find out next year whether that was the right or wrong response,” he said.

Mr Cacho predicted two more business-as-usual increases in November and December, with “the risk we could see one or two hikes next year”.

“I suspect the RBA will go to a watch-and-wait policy like in a normal hiking or loosening cycle, with moves every two or three months as required,” he said. “The hurdle to going back to 50 (basis points) from here is very high.”

Barrenjoey chief economist Jo Masters said the RBA’s decision to slow the pace of hikes a month earlier than expected would mean rates likely now top out at 3.1 per cent in December, rather than 3.35 per cent.

“We think that by February the data will show them (the RBA) that the economy is softening and provide greater con­fidence that inflation has peaked,” Ms Masters said.

Another 0.25-percentage-point increase in February could not be ruled out, she said, particularly if the dollar began to come under heavy pressure as other central banks continued to drive interest rates higher.

Ms Masters said Tuesday’s more “dovish” RBA decision did not materially alter the outlook for jobs or inflation. The unemployment rate – at 3.5 per cent – would “bounce around” over coming months.

“On our numbers, a terminal rate of 3.1 per cent is sufficient to bring the economy back into balance and to forecast inflation back in the band in early 2024,” she said.

As the Reserve Bank of New Zealand announced a further 0.5ppt hike on Wednesday – and said it considered moving by 0.75ppt – ANZ head of Australian economics David Plank said it was a “brave decision” for the RBA to break ranks with global peers. He said he now expected a slower but longer cycle ending with rates at 3.6 per cent next year, rather than 3.35 per cent.

“The risk is they have weakened their message” by slowing the pace of hikes, he said.

“Our revised forecasts partly encapsulate that, but also that inflation pressures are stronger than we thought.”

REA Group head of economic research Cameron Kusher said the surprise early reduction in the size of rate hikes would not be enough to prevent an eventual 10-15 per cent decline in house prices nationally.

With potential buyers’ borrowing capacity reduced by 20 per cent as a result of higher mortgage rates and amid declining property values, Mr Kusher said sales activity had slowed and the number of homes on the market was trending higher.

“There’s less competition and more choice, so getting the buyer to say ‘yes’ is now much more difficult,” he said.

Mr Kusher said the real pressure point was in the rental market, which was continuing to tighten despite very low vacancy rates and double-digit increases in asking rents.