Economists expect 3.10% December cash rate

To pause or not to pause — that was the question many economists had been asking themselves regarding the December cash rate decision, but key economists are now largely in agreement that today ( 6 December),  the Reserve Bank of Australia (RBA) will increase the cash rate by 25 basis points (bps) — taking it to 3.10 per cent.

Following seven consecutive cash rate increases (starting with 25 bps in May, then 50-bp jumps in June, July, August, and September, before a return to 25-bp lifts in October and November) there had been general expectations of a possible pause in increases this month. However, the major banks generally believe that is now unlikely.

A recent marginal decline in reported (‘lagged’) inflation buoyed many that the last cash-rate announcement for 2022 would provide consumer and mortgage holders some false sense of reprieve, but the possibility of another 25-bp hit ‘minimum’ has solidified.

Bated breath as information noise filtered

Australia and New Zealand banking Group (ANZ) confirmed to Mortgage Business on Monday (5 December), that it sees “the RBA tightening by 25bp on Tuesday, despite the weak October retail sales and the softer-than-expected October monthly CPI indicator,” explained ANZ Research Team members David Plank, Catherine Birch, Felicity Emmett and Adelaide Timbrell.

“With regard to the monthly price data, RBA deputy governor Bullock has said that it will take time to ‘figure out what is the noise and what is the information’, they cited.

“As we saw last quarter, the softer first monthly CPI of the quarter wasn't a particularly useful predictor for the quarter as a whole.

“A December pause will be considered, but with the RBA not meeting again until February and the recent wages and employment data being robust we expect the cash rate target to be lifted 25bp to 3.1 per cent.

“It is notable that the market thinks there is a good chance of a pause. “At the timing of writing, the market was pricing,” they explained.

Tweaking the forward guidance

Commonwealth Bank Australia (CBA)’s head of Australian Economics, Gareth Aird, said the big four bank was expecting the RBA to raise the cash rate at the December board meeting by 25bp to 3.10 per cent.

“The risks sits with no change, but we consider that risk to be low (~20%),” he outlined.

“We expect a shift in forward guidance that would see the RBA retain a tightening bias, but also pave the way for a potential pause in the tightening cycle in February 2023.

“We expect that at the December board meeting the discussion will be between raising the cash rate by 25bp or leaving policy on hold.

“We do not anticipate that the board will discuss the case to raise the cash rate by 50bp.

“Since the November board meeting the economic data has been mixed,” Mr Aird added.

“There is a strong case to leave the cash rate on hold in December given the RBA has already delivered an incredible 275bp of tightening over just seven meetings (six months).

“It takes time for this tightening to impact the demand for goods and services and by extension prices. A further 25bp hike in December would mean an unprecedented 300bp of rate hikes over just seven months,” he summarised.

“The RBA is still flying blind to a degree given the last few rate hikes have not yet hit home borrowers from a cash flow perspective.

“There is also a very big expiry of fixed rate home loans over the next year which means monetary policy is operating with a greater than usual lag.

“That said, we don’t expect the RBA to leave the cash rate on hold in December,” Mr Aird concluded.

"We assign an 80 per cent probability to a 25bp rate hike.”

Challenging the assessment

According to National Australia Bank (NBA) Global Markets Research economist Taylor Nugent, he explained: "The RBA has held out that wage and inflation dynamics in Australia are different to other countries, and while that was true over the initial reopening phase, recent data is challenging the assessment that the backdrop is fundamentally more benign.”

“With such risks, we think it is too early for the RBA to consider pausing rate increases, and we expect the RBA to continue in a string of 25bps increases, lifting rates in December, February and March and taking the cash rate to 3.60 per cent.

“Market pricing of an 80 per cent chance of a 25bp hike at December and February looks too low,” Mr Nugent outlined.

Confidence in Dec and Feb increases

Westpac Bank chief economist Bill Evans says the big four bank expects the RBA board will decide to raise the cash rate by 25 basis points from 2.85 per cent to 3.1 per cent.

“A further 25 basis point adjustment at the December meeting is likely to have been firmly on the Board’s future agenda when it last met on November 1,” Mr Evans said.

“Recall the added attraction of moving in December is that the next meeting will not be until February 7, providing ample opportunity to assess the cumulative impact of the normalisation process.

“In the Minutes to the November meeting the Board discussed increasing the rate by 50 basis points while noting that, ‘interest rates were still fairly low in an historical context.’

“Indeed, the decision to raise the cash rate by only 25 basis points at the November meeting came as a surprise to Westpac given the September quarter Inflation Report printed a 1.8 per cent rise (in underlying terms) for the quarter – well in excess of market forecasts of 1.5 per cent.

“A more worrying aspect of the Report showed that “around three quarters of prices in the CPI basket grew faster than 3 per cent in annualised terms in the September quarter” (RBA November SoMP) and the annual growth in the Trimmed Mean reached 6.1 per cent – the strongest outcome since 1990.”

[Related: Communication ‘failure’ flagged as borrowers get RBA apology]