Interest rates likely to peak in 2023: forecast

It’s almost certain the Reserve Bank of Australia will increase the cash rate again. But what we don’t know is when or where it will peak.

The RBA has raised the cash rate for seven consecutive months to November, taking it from 0.10% to 2.85%, in a bid to slow and ultimately reverse rising inflation.

After the November decision, the RBA board announced, in a statement, that it “expects to increase interest rates further over the period ahead”.

The statement added: “The size and timing of future interest rate increases will continue to be determined by the incoming data and the board’s assessment of the outlook for inflation and the labour market. The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that.”

As the statement makes clear, the RBA is open-minded on how many “future interest rate increases” it will make. However, economists at the big four banks have speculated on when the cash rate will peak, issuing forecasts ranging from 3.10% to 3.85%.

Commonwealth Bank - 3.10%

Commonwealth Bank's head of Australian economics, Gareth Aird, said the RBA will make only one more increase, to 3.10%. Any higher would pose a risk to the economy, he said. “Financial markets have currently priced a peak in the cash rate of 3.85%, to be reached in [the third quarter of 2023]. We believe that if such pricing is realised the Australian economy will not have a soft landing and the unemployment rate will rise materially above the level consistent with full employment. Such an outcome is not what the RBA is trying to achieve."

NAB - 3.60%

NAB chief economist Alan Oster expects the RBA to increase the cash rate by 0.25 percentage points at each of its next three meetings, taking the cash rate to 3.60%. "We expect the RBA to pause thereafter as it assesses the impact of the considerable monetary tightening in place. A key uncertainty for the outlook remains around the response of the household sector to the considerable tightening put into place to date."

Westpac - 3.85%

Westpac chief economist Bill Evans said the minutes from the RBA’s November meeting hint that we’re closer to the end than the beginning of this rate rise cycle. “However, rising and broadening inflation; likely boosts to wages growth; tight labour markets; and the huge risk that this 'flirting' with easy policy can risk boosting inflation psychology still point to the need for the board to stay the course (in our view, a terminal rate of 3.85% by May) to allow the policy objectives to be achieved."

ANZ - 3.85%

After the RBA’s November decision, ANZ head of Australian economics David Plank said: “We maintain our view of a further [0.25 percentage point] hike in December and an eventual peak in the cash rate of 3.85% in May." That said, ANZ's RBA Bias Index, which uses natural language processing to assess the language used in the RBA's monthly statements, forecasts a cash rate of around 3% by May 2023.

If your interest rate has increased and you’d like to see if you could be on a more competitive rate, give me a call.