Australia's biggest bank sees RBA cutting interest rates in 2023

AUSTRALIA'S largest lender expects current aggressive monetary policy tightening to weigh heavily on the economy and force the Reserve Bank (RBA) to reverse course and cut interest rates in the second half of 2023.

Commonwealth Bank of Australia on Thursday (Jun 9) downgraded its GDP growth forecasts and now predicts the A$2.2 trillion (S$2.2 trillion) economy will expand 3.5 per cent this year, down from a previous 4.7 per cent, and then slow to a "below-trend" 2.1 per cent in 2023, compared with 3.1 per cent seen previously.

The RBA "looks very intent on dropping the inflation rate quickly", said Gareth Aird, head of Australian Economics at CBA. "But this will come at the expense of growth in aggregate demand, particularly household consumption."

Australia's central bank surprised markets and economists this week with a 50 basis point rate rise to 0.85 per cent and signalled its intention to rapidly normalise policy. Governor Philip Lowe said the RBA's board will do "what is necessary" to ensure that inflation returns to its 2-3 per cent target band.

A number of economists are pricing in a further half-point increase in July or August and Aird expects the cash rate will reach 2.1 per cent by year's end, with a risk of 2.35 per cent.

"With the RBA now expected to take the cash rate to a contractionary setting we have pencilled in rate cuts for the second half of 2023," he said in a research note, forecasting 50-basis points of rate cuts in that period.

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He also expects:

• Headline inflation to peak at 6.25 per cent over 2022 and then decline to within the 2-3 per cent target by late 2023
• Unemployment to stay at a very low 3.75 per cent over 2022, then move higher over 2023 to 4.5 per cent
• National home prices to decline by about 15 per cent by end-2023 - from peak to trough

Aird added that fiscal policy "remains incredibly important" to the outlook and is "a key source of uncertainty".

Australia ended 9 years of centre-right rule at a May 21 ballot, electing the Labor party to office. New Treasurer Jim Chalmers is planning to hand down a budget in the second half of October.

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Australia hikes interest rates to rein in inflation

Aird isn't the only economist predicting the RBA will have to ease back from aggressive tightening.

Money markets are pricing in outsized hikes from the RBA in coming months and see the cash rate above 3 per cent by December.

"Our central bank appears to now be first and foremost inflation fighters," Aird said. "Their objective of 'the economic prosperity and welfare of the people of Australia' has taken a back seat to their desire to drop the rate of inflation." BLOOMBERG