Overview

• Following the first RBA meeting of the year and the release of the February SoMP, NAB now sees the RBA lifting rates to a peak of 4.1% in May, including 25bp increases at each of the next three meetings.
•  Since we upped our call to 3.6% last October, the economy has remained resilient to both higher inflation and interest rates. Our business survey (out today) and consumer transaction data (tomorrow) indicate this resilience continued in January, and we continue to expect strong prints for wages and inflation to continue in the near term.
• We still see a strong case for the RBA to look to pause the current hiking cycle soon given the considerable tightening put in place, the ‘long and variable lags’ and the need to look through some unusual features of the post-COVID normalisation period. However, the RBA’s framing of domestic inflationary pressures has clearly changed and as such, we judge it to be unlikely the Board will feel comfortable pausing before May.
• A cash rate peak above 4% will have a significant impact on economic growth, and we expect GDP to be below 1% over both 2023 and 2024 despite the more optimistic near-term outlook. We also expect the RBA will need to cut interest rates in 2024 to closer to neutral to support growth as inflation moderates. Our full economic forecasts will be released next Tuesday.

For further details, please see the Monetary Policy Update (14 February 2023)