All eyes will be on the Reserve Bank of Australia’s monthly interest rate update on Tuesday 7 February.

With the December quarter 2022 CPI print showing headline inflation is still running strong at 7.8 per cent, expectations are for a further increase in the cash rate at the RBA’s first Board meeting of the year.

Comparison of recent RBA rate hike cycles Comparison of recent RBA rate hike cycles

But with weaker than expected recent employment data, ABS retail sales for December down 3.9 per cent, house prices still falling and large volumes of fixed rate mortgages set to expire this year, CBA economists believe the RBA will pause its tightening cycle thereafter.

“Inflation once again surged in Australia over the December quarter 2022. Headline CPI came in stronger than market expectations and although it was a little below the RBA’s forecast, the underlying inflation rate printed stronger than they predicted at 6.9 per cent,” comments CBA’s Head of Australian Economics Gareth Aird.

“The RBA maintained a hiking bias in December and with inflation still strong we expect them to deliver on this at their February Board meeting. We’re maintaining our forecast that they will raise the cash rate by 25bp to 3.35 per cent, before pausing the tightening cycle. However a larger hike of 40bp coupled with a stated intention to pause could also be on the table.

Schedule of expiring CBA fixed rate home loans Schedule of expiring CBA fixed rate home loans

“An important consideration for the RBA is that fixed rate mortgages have so far insulated many Australians from interest rate increases. There is a lag effect on previous rate hikes and large volumes of fixed rate mortgages expiring this year and higher monthly borrowing payments should cool demand. Taking the cash rate further into restrictive territory by the RBA could prove recessionary and counterproductive,” Mr Aird said.

Soft economic landing – interest rate cuts possible later in year

While the Australian economy performed strongly in 2022, CBA is forecasting a soft landing in 2023 as household consumption slows – as evidenced in the bank’s latest credit and debit card spend data. Annual GDP growth is expected to decline significantly to 1.1% per cent at Q4 23 (from 2.6% per cent at Q4 22), with falling inflation also setting the scene for the RBA to commence interest rate cuts in the back end of the year.

Based on its expectation of one further RBA rate hike in February, CBA continues to forecast a 15 per cent decrease in Australian house prices from peak to trough.

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