Overview

• After a sequence of surprises from the RBA in recent months, we are reverting to our baseline expectation from February that the cash rate will rise to a peak of at least 4.1% – which we pencil in for July, though we see some risk the RBA could wait till August.
• Our February call of a likely 4.1% peak in the cash rate was based on three fundamentals: that inflation would remain well above target in the near term; that the economy was displaying considerable resilience; and that a tight labour market would continue to support a pickup in wage growth. These fundamentals all remain evident.
• The key uncertainty for our rate expectations has been the reaction function of the RBA, and monetary policy strategy of the RBA been marked by some mixed signals in 2023. However, it is clear that the near-term balance of risks on inflation remain to the upside, and the RBA is forecasting inflation to only return to the top of the target band by mid-2025. At least one additional rate rise is likely to be necessary to limit the risk this timeline slips any further. We wouldn’t rule out the prospect of an additional rise to 4.35% if the data stays stronger for longer.
• Importantly, our rate call is not a response to the recent Federal Budget, which we judge to be broadly neutral in terms of its effects on inflation and implications for monetary policy.
• It remains our view that, as higher rates pass through to household cash flows and the wider economy, the economy will begin to slow more noticeably in the second half of 2023 and into 2024, seeing annual GDP growth slow to below 1% and the unemployment rate begin to rise, reaching around 4.7% in 2024. This makes it an increasingly difficult balancing act for the RBA to manage inflation lower without slowing the economy too much. We continue to expect the cash rate to return to a more neutral setting of 3.1% by mid-2024 as this slowdown takes hold.

For further details, please see the NAB Monetary Policy Update (15 May 2023)