The Commonwealth Bank of Australia (ASX: CBA) share price has dropped by 13% since early February 2023. The outlook for the ASX bank share for June and beyond faces a few uncertainties.
Over the past year or so, the Reserve Bank of Australia (RBA) interest cash rate has jumped from 0.1% to the latest rate of 4.1%.
As Australia's largest lender, what happens with interest rates can have a key impact on the CBA share price and its operational performance.
What happened with interest rates?
The RBA decided to increase the cash rate target by a further 25 basis points to 4.10% today. Governor Dr Philip Lowe noted that inflation has "passed its peak" in Australia, but at 7% it's "still too high and it will be some time yet before it is back in the target range".
Lowe is so determined to return inflation to the 2% to 3% range because:
High inflation makes life difficult for people and damages the functioning of the economy. It erodes the value of savings, hurts family budgets, makes it harder for businesses to plan and invest, and worsens income inequality. And if high inflation were to become entrenched in people's expectations, it would be very costly to reduce later, involving even higher interest rates and a larger rise in unemployment.
He pointed to recent data that indicated that inflation could remain stronger than desired, so the RBA's board has responded to this. Goods price inflation is "slowing", but services price inflation is still "very high and is proving to be very persistent overseas". The RBA also pointed out that unit labour costs are rising briskly, with productivity growth remaining "subdued".
In its concluding thoughts, Lowe said that "some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe."
It will track developments in the global economy, trends in household spending, and the outlook for inflation and the labour market.
What to make of this for the CBA share price outlook
The tricky thing for CBA is that higher interest rates may not add much to profitability now that deposit competition is much stronger.
If the net interest margin (NIM) stays roughly the same, then CBA's lending profit may not improve much, yet the possibility of arrears is increasing. Households and businesses can only absorb so many interest rate increases before it's too much to afford.
In the quarterly update for the three months to March 2023, released in May, the CBA boss Matt Comyn warned that many of its customers were "feeling the strain of higher interest rates and the rising cost of living." CBA is expecting economic growth to "continue to moderate".
The bank said in that quarterly update that its income was flat, and volume growth was offset by lower net interest margins from competitive pressures. It's those competitive pressures that are keeping the banking sector's NIM lower.
However, according to reporting by the Australian Financial Review, the major banks of CBA, National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and ANZ Group Holdings Ltd (ASX: ANZ) have stepped back from cashbacks, lowering the competition pressures for the market.
The market now seems fully aware of the competitive nature of the industry, so I don't think the CBA share price is going to fall much more unless/until the bank's arrears start noticeably climbing.
However, with inflation seemingly staying high, it'd be wise to expect that interest rates may stay higher for longer.
