As we know by now, the Governor has estimated the neutral rate to be at least 2.5%. With the September rate hike of 50 basis point, we now have a cash rate of 2.35%. As of the most recent RBA statement they have removed the ‘normalisation’ phrase, meaning that the Board now believes they are nearing the neutral rate.
Outcome of Nearing Neutral Rate
Monetary Policy has moved very quickly to neutral. The cash rate is expected to increase further due to the tightness of the labour market, rising wages growth, and high inflation. These issues mean that the RBA will now want to move the cash rate from a neutral position to a contractionary position. However, it is unlikely that the urgency will be as high in this phase of the cycle.
It is widely believed amongst economists that the pace of rate hikes will decrease after the September hike. The RBA has meetings more frequently compared with other countries such as New Zealand (who meet 7 times per year), this leads to a very swift increase in interest rates.
What is the Final Result?
Economists now believe that with the current market conditions, the RBA will look to a cash rate of 3.35%. However, economists expect this target be reached early next year (meaning slower rate hikes).
Outlined in the recent RBA statement ‘the Board expects to increase interest rates further over the coming months’. Therefore, we do expect interest rates to continue rising at a slower pace until the beginning of next year. However, the good news for homeowners is that the bulk of the rate hikes are now behind us.
For more information feel free to read the RBA Statement, on their reasoning behind the rate hikes, and their outlook on the economy.
Source: Westpac
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