Economists raise RBA cash rate outlook to 3.1% by year’s end

ECONOMISTS raised their forecasts for Reserve Bank of Australia (RBA) policy tightening as they boosted expectations for household spending amid a very tight labour market and elevated savings levels.

The RBA will raise its cash rate by a further 75 basis points over the final 3 months of this year to 3.1 per cent, versus a previous 2.85 per cent, according to the median estimate in a Bloomberg survey. Economists now see a peak of 3.35 per cent in the first quarter after significantly upgrading consumption forecasts.

“We expect the RBA, under pressure from sticky annual inflation above 3 per cent over the forecast period, to lift and keep the cash rate above 3 per cent,” said Stephen Roberts at Laminar Capital. That will cause “a marked moderation in economic growth”.

Australia’s central bank is in the midst of its sharpest policy tightening cycle in a generation, having hiked by a half-percentage point at its past 4 meetings to take the cash rate to 2.35 per cent. Governor Philip Lowe has signalled a potential step down in the size of rate rises ahead, though a number of economists only expect that shift to occur in November.

The statistics bureau will release third-quarter inflation data on Oct 26 that’s expected to show a further acceleration in prices, with the RBA forecasting a peak of just under 8 per cent late this year. Economists also upgraded their inflation forecast to 7.4 per cent in the final 3 months of the year.

“Higher growth means higher inflation for longer,” said Josh Williamson, chief economist for Australia and New Zealand at Citibank. “Underlying inflation is expected to remain outside the RBA’s 2-3 per cent target band throughout 2023.” BLOOMBERG