RBA rate hike on the cards, CBA warns

CBA’s Gareth Aird warns a rate hike is the near-term risk, as he pushes out expectations for the easing cycle.

CBA sees rates on hold for longer but has warned a hike could potentially be the RBA’s next move.

Mortgage-holders hoping for some rate relief from the Reserve Bank could get a shock next month, with a rate hike now the near-term risk, Commonwealth Bank has warned.

Not only that but the easing cycle, when it kicks in, will be slower than previously expected, with most of the cuts pushed back to 2025, CBA’s head of Australian economics, Gareth Aird said on Tuesday.

“We believe that incredibly strong population growth, driven by net overseas immigration, has put upward pressure on some important components of the CPI basket; most notably the housing‑related components. As a result, demand is stronger and so inflation is falling less quickly than otherwise,” Mr Aird wrote in a note.

“The upshot is the monetary policy will need to stay at a restrictive setting for longer to bring inflation back towards the mid‑point of the RBA’s target band.”

With a neutral cash rate in the 2.5‑3 per cent range, a policy rate above 3 per cent is deemed restrictive.

“The near‑term risk sits with an interest rate hike,” Mr Aird warned. “But we expect the RBA to be on hold over the next six months given the economy is still contracting on a per capita basis, inflation is forecast to fall further, and the labour market is anticipated to loosen.

“Our base case now sees the RBA commence an easing cycle in November 2024 (from September 2024 previously).”

CBA now sees just one 25 basis point rate cut this year, down from the 75 basis points it had tipped before last Wednesday’s inflation numbers.

If the RBA cuts once this year, it will bring the official cash rate to 4.1 per cent. CBA expects much of the rate relief to come next year, with the lender pencilling in 100bps – or four rate cuts – through 2025.

“We favour the meetings that align with the quarterly SoMP publication (i.e. February, May, August and November).

“Such an outcome would see the end‑2025 cash rate at 3.10 per cent (compared with our previous call of 2.85 per cent),” Mr Aird wrote.

“Given our estimate of the neutral cash rate, monetary policy remains restrictive through 2024 and 2025 on our forecast profile.”

CBA now expects below‑trend economic growth to continue through the rest of this year, with the labour market loosening further and wages pressures moderating. All of this will help drag inflation back to the RBA’s target band, according to Mr Aird.

“Notwithstanding, the disinflation process is likely to take a little longer than we previously anticipated due to very strong population growth continuing to put upward pressure on some non‑discretionary components of the CPI basket.”

CBA’s updated rate forecasts came as data from the Australian Bureau of Statistics showed weaker-than-expected retail sales for March.

Retail sales dipped 0.4 per cent in the month versus the expected 0.2 per cent rise, the data released on Tuesday showed.

Consumers pulled back on spending in March amid cost-of-living pressures, ABS head of retail statistics Ben Dorber said.

“Underlying retail turnover has been flat for the past six months and was up only 0.8 per cent compared to March 2023,” he noted.

“Outside of the pandemic period and introduction of the GST, this is the weakest growth on record when comparing turnover to the same time in the previous year.”