Key Points
- Interest rates have been increased by a full four percentage points since May 2022.
- Three of the big four banks are forecasting a rate rise in August.
- The Reserve Bank has been hiking rates in a bid to curb inflation.
Will the Reserve Bank of Australia (RBA) hike interest rates for the 13th time in less than 18 months, or leave them on hold on Tuesday? It could go either way, economists say.
Market Economics managing director Stephen Koukoulas told SBS News that "consensus from economists and financial markets are pretty evenly split at the moment".
These are some of the factors at play within the Australian economy that could influence the RBA's decision.
Recent rate rises in Australia
Interest rates have increased by a full four percentage points since May 2022, with Australia's official interest rate now sitting at 4.10 per cent.
The RBA has been hiking rates from a record low of 0.10 per cent in a bid to curb inflation back to its target band of 2-3 per cent.
A graph showing how Australia's interest rates have changed. Source: SBS News
Core inflation — a measure that strips out volatile food and fuel items — peaked at 6.9 per cent in the December quarter. It came in at 6.6 per cent in the March quarter, and 5.9 per cent in the June quarter
Both the March and June quarter figures came in below the RBA's predictions.
What could influence the RBA's interest rate decision?
A number of market analysts had suggested the easing of inflation had reduced the chances of an interest rate rise.
Another figure that will factor into the RBA's call on interest rates is retail sales.
Last week's ABS figures showed retail sales data had come in well below expectations. There was a 0.8 per cent fall in retail spending in June, with the pullback following a 0.8 per cent lift in May and a minor 0.1 per cent fall in April.
A slowdown in retail turnover over time could indicate that interest rate rises are having the desired impact on spending that the RBA had hoped to begin addressing inflation.
ABS head of retail statistics Ben Dorber said extra discounting and promotional activity in May, leading up to mid-year sales, delivered a boost in retailer turnover, "but that proved to be temporary as consumers pulled back on spending in June".
"Retail turnover fell sharply in June due to weaker than usual spending on end-of-financial-year sales. This comes as cost-of-living pressures continued to weigh on consumer spending," Dorber said in a statement last week.
While inflation has passed its peak, signs it could add complexity to the impending cash rate decision.
A future-looking measure of the inflation picture shows consumer prices growing at a faster clip in July compared to the previous month.
The Melbourne Institute's inflation gauge, which uses the same techniques to measure price change movements as the official ABS dataset, grew by 0.8 per cent in July, up from 0.1 per cent in June.
On an annual basis, the gauge continued moderating, growing by 5.4 per cent compared to 5.7 per cent in June.
Retail spending was down in June 2023 in Australia. Source: Getty / Jenny Evans
IFM Investors economist Alex Joiner said the monthly rebound in the Melbourne Institute gauge suggested the pace of inflation was not in freefall, but gradually moderating.
"One for those looking for the RBA to hike tomorrow - uncertainty around the inflation outlook persists a little more in Australia than elsewhere," he wrote on social media on Monday.
Interest rate predictions
Commonwealth Bank forecasts one final quarter of a percentage point rate hike in August, which would bring rates to 4.35 per cent.
Westpac, which had previously forecast possible rises of 0.25 per cent in both August and September, now predicts a quarter of a percentage point increase in August will likely take place and be "sufficient," without a follow-up rise the next month.
ANZ believes the official cash rate will be left on hold at the current rate for "an extended period."
NAB suggests rates will rise in August and again in September, forecasting they will peak at 4.6 per cent.
The RBA shadow board, made up of macroeconomists from the Australian National University, is narrowly leaning towards a pause on Tuesday.
St George senior economist Jarek Kowcza believes the RBA will hike Australia's official interest rate to 4.35 per cent.
"We concede it will be another close call and finely balanced decision," he wrote.
Why did the RBA leave rates on hold in July?
The minutes from the RBA's July meeting released a fortnight later, revealed members of the bank had considered whether continued rate rises could have a greater impact on consumer responses than initially expected.
"Members observed that there was considerable uncertainty about the resilience of household consumption and that the squeeze on many households' finances could result in consumption slowing more sharply than implied by the current forecasts," the minutes stated.
They said higher interest rates could encourage households to save more, which would affect consumption and in turn, slow the demand for labour.
"The unemployment rate would be likely to rise beyond the rate required to ensure inflation returns to target in a reasonable timeframe," the minutes read.
Deloitte Access Economics partner Stephen Smith raised this concern following the release of the latest inflation figures.
"The RBA has increased interest rates significantly, and the full impact hasn't yet been felt, we won't know whether the RBA has overdone it, if you like, for several months," Smith told SBS News at the time.
Koukoulas also said hiking interest rates too far could increase the chance of a recession.
"The risk is that we get something close to it. If we don't actually get what they might call an official recession, we'll get something close to it for many people," he said.
Koukoulas said those who borrowed large amounts at the low point of the interest rate cycle a year or so ago could experience financial stress, but other sections of the economy could avoid such outcomes.
"Hopefully, we can muddle through for the next six months, we get into 2024 we get a new Reserve Bank, inflation will be down, and well, it's premature to talk interest rate cuts, but we may be seeing 2024 as the year of interest rate cuts," he said.
RBA's announcement to come at 2.30pm AEST
Tuesday's meeting will be the second last meeting with the RBA headed by Lowe.
The RBA has also released its when its 11 monthly meetings (held each month except January) will be condensed to eight.
Meetings will be held in each of the last two months of each financial quarter.
- With additional reporting by the Australian Associated Press.
