Will the Reserve Bank hike, cut or leave rates on hold? Here’s what you need to know

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Key Points

The Reserve Bank of Australia is set to announce whether interest rates will change.
After 13 increases to interest rates across 2022 and 2023, there have not been any hikes this year.
Most Australian economists are in agreement about what the RBA will decide this month.

The official cash rate is 4.35 per cent. That could change by Tuesday afternoon, with Australia’s central bank set to announce its latest decision on interest rates.

In 2023 many mortgagees were holding out hope for possible rate cuts in the following calendar year, but upon leaving rates on hold in May, the Reserve Bank of Australia (RBA) warned the process of returning inflation to target was .

Mortgagees will likely be closely monitoring the outcome of.

An increase to interest rates

Diana Mousina, deputy chief economist at AMP said while that the RBA would use that as a reason to increase rates, she didn’t think they needed to be concerned.

“The potential risk for a rate hike came after the last quarterly inflation data, which was stronger than expected for the trimmed mean in particular and then the monthly data after that, which was a little bit stronger as well,” Mousina said.

A woman with brown hair, wearing a white blazer, staring directly at the camera.

Diana Mousina, deputy chief economist at AMP, is tipping the RBA to keep rates on hold at 4.35 per cent. Source: Supplied

“But we don’t think that there’s been anything in the data within the last month that would suggest the need for a near-term rate hike, or a rate hike on Tuesday at least, because there’s just no real justification for it.”

Mousina said the were having the intended consequences.

“There’s no real need for interest rates to be higher because inflation is still coming down, growth has clearly slowed.

“There’s many signs that interest rates are working as the Reserve Bank would like them to through weakening consumer spending, through slowing housing construction, the flow through to the economy, and some weakening in the labour market,” she said.

A graph showing the change in interest rates since September 2021.

There were 13 interest rate hikes between 2022 and 2023. Source: SBS News

Cut rates or keep as is?

With inflation remaining above the central bank’s 2 to 3 per cent target since late 2021 and the jobless rate easing to 4 per cent, most say an early rate reduction seems unlikely.

However, an increase to interest rates seems even less likely.

A survey of 43 economists by Reuters found all tipped the official cash rate to remain unchanged following this week’s two-day meeting.

RSM economist Devika Shivadekar said she expected the RBA to deliberate on a hike at the meeting but for rates to remain on hold.

“Since the central bank’s last policy meeting, economic data have shown that Australia’s growth continues to be lacklustre. As a result, the bank will be holding its breath while waiting on data and insights over coming months,” she said.

Commonwealth, NAB, and Westpac banks also predict rates will stay unchanged through the third quarter.

Reasons to hold

Shivadekar said a cautious stance from the RBA was “prudent” for several reasons.

“Firstly, any potential inflationary impacts of budget cost of living handouts and stage three tax cuts would only materialise over the course of the next four to six months,” she said.

A street view showing a row of houses, with cars parked in the street.

People with a variable interest rate mortgage will likely be interested in the RBA’s decision on Tuesday, as it could have a direct impact on their budget. Source: AAP / Dan Himbrechts

“Secondly, despite the labour market remaining relatively tight, there are signs that hiring intentions are easing, which should help moderate wage growth in the near future, further supporting the modest wage revisions by the Fair Work Commission.”

Looking to the rest of the year

All but one economist in the Reuters poll expect the RBA’s next move — after keeping rates on hold for some time — to be a cut, rather than an increase.

Nomura senior economist Andrew Ticehurst said the risk of a rate hike was very low, “but the RBA’s response to high inflation data would be to keep current high rates for longer”.

“Growth is soft, unemployment should rise over coming months and wage growth has likely peaked. As this happens, we think the RBA will become more confident inflation, including services inflation, will slow … [and] will allow a gentle easing cycle to commence around November.”

A nearly 90 per cent majority, 38 of 43 economists, predicted interest rates will remain unchanged in the year’s third quarter.

63 per cent of economists, 27 of 43, forecast that interest rates will fall to 4.10 per cent or lower by the end of the year.

A 35 per cent minority expect no change this year, and one economist in the group said they expected a hike to 4.85 per cent.

CBA, NAB, and Westpac have said they expect one 0.25 per cent cut in the fourth quarter, while ANZ predicted the first cut would not come until February.

The RBA’s decision on interest rates is expected to be announced at 2.30pm (AEST) on Tuesday.

With additional reporting by Reuters.

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