📝 See A Greater Risk Of 3.6% Peak Cash Rate: NAB

With this earlier pause and our central forecast, 3.6% may well mark the peak of interest rates for Australia this cycle as we envisage considerably slower growth in the second half of 2023, moderating inflation and an increase in the unemployment rate.

It would be usual for the Board to remain on hold now for a number of months. What would cause the Board to raise interest rates further? This would likely require, in the near term, a significant inflation or wages shock, something that can’t be ruled out as the RBA has been quite reactive to surprises in this sense in recent months.

NAB’s forecasts have been that interest rates would peak at 3.85% this month and that the RBA would commence cutting interest rates in Q1 next year, taking the cash rate back toward a more neutral rate around 3%. The prospect of modest interest rate cuts next year remains our expectation, though there is increased risk that 3.6% might now be the peak for this cycle.

The greatest risk of further tightening in the near term is likely to come from the labour market remaining very tight and wages continuing to pick up, something the RBA continues to monitor closely. Medium term, the risk would be that inflation does not moderate sufficiently for the Bank to forecast the return of inflation to the 2-3% target. 

For now, our conclusion is that there is greater risk that 3.6% is the peak in Australian cash rates for this cycle, and that the next move may be toward lower interest rates, but not until next year.

- NAB