Interest rates are going to be on the agenda again next week. That's because the Reserve Bank of Australia (RBA) will be meeting on Tuesday to decide on the cash rate.
Last month, the central bank elected to keep rates on hold. But will this be the case again in October?
Let's see what the economic team at Westpac Banking Corp (ASX: WBC) is saying about next week's RBA meeting.
What's going to happen with interest rates next week?
According to the bank's latest weekly economic report, much to the delight of borrowers, Australia's oldest bank believes the new RBA governor Michele Bullock will keep her powder dry on Tuesday. It commented:
The Reserve Bank Board meets next week on October 3 with Governor Bullock presiding over her first meeting. We are certain that the Board will decide to continue the pause that began at the July meeting. The Board meetings which occur immediately before the release of the quarterly Inflation Report and the updating of the staff's forecasts (namely those in April, July and October) have been ones where the Board has shown a preference to pause – even during this long tightening cycle.
And while there have been concerns that August's stronger-than-expected inflation reading could lead to a surprise hike, Westpac believes the RBA will be more focused on the upcoming quarterly inflation reading. It adds:
It is unlikely that the August Monthly CPI Indicator is a game changer. Annual inflation lifted from 4.9% in the year to July to 5.2%, mainly reflecting a 9% lift in petrol prices. A more reliable indicator – the Monthly Trimmed Mean, which excludes volatile items – actually slowed from 5.8% to 5.5%. The more comprehensive September quarterly Inflation Report will be watched closely by the Board and the market – with information from that quarterly update to feed into the RBA's considerations at the November Board meeting.
What about future meetings?
While the market believes there will be one more hike, thankfully for borrowers, Westpac believes interest rates have peaked and that a rate cut will be next on the menu in August next year. It adds:
The market is currently giving around a 40% chance of a rate hike in November lifting to 90% in March. Despite this market pricing, which is also indicating no rate cuts until 2025, we expect that the cash rate will remain on hold until August next year when the first rate cut can proceed.
Our forecast for the conditions the Board will be facing by then will be an inflation rate that has fallen from 4.1% to 3.4%; an unemployment rate of 4.5%; and economic growth through the year to June of 1.0%.
After which, the bank is expecting a series of cuts to take the cash rate down to 3.1% by June 2025. Finally, some relief for borrowers could be on the horizon!
