RBA seen pausing rate hikes at 3.85% as inflation eases

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RBA seen pausing rate hikes at 3.85% as inflation eases
Credit: © Reuters.

By Ambar Warrick

Investing.com -- Australian interest rates are expected to peak soon as inflation eases from over thirty-year highs, with the Reserve Bank of Australia expected to potentially hike rates at least one more time before announcing a pause.

National Australia Bank (ASX: NAB ) said on Thursday that it now expects the RBA’s cash target rate to peak at 3.85%, compared to a prior forecast of 4.1%. This comes a few weeks after peer Westpac (ASX: WBC ) also cut its forecast for peak rates to 3.85%.

The RBA’s benchmark rate currently stands at 3.60%. Considering that the bank has been hiking rates by 25 basis points since late-2022, forecasts point towards a pause after at least one more rate hike.

The shift in market expectations for the RBA is driven by a cooling in Australian inflation over the past two months. Data on Wednesday showed that consumer price index inflation fell more than expected to 6.8% in February - its lowest level since July 2022.

The reading marked a second straight month that inflation eased in the country, after touching an over 30-year peak of 8.4% in December.

The drop in inflation comes in line with a forecast from the RBA that price pressures will moderate towards mid-2023, as global supply chain disruptions ease. Easing commodity prices are also expected to help bring down inflation.

But the RBA still expects inflation to trend above its 2% to 3% target band until at least mid-2025.

The central bank had considered a pause on rate hikes during its most recent meeting, and said it will reconsider such a move in April. This comes after the RBA hiked rates by a cumulative 350 basis points since early 2022, as it moved to curb a post-COVID bounce in inflation.

But the central bank recently warned that the path to a “soft landing” for the Australian economy remained a narrow one. Economic growth is expected to cool substantially this year, while unemployment is expected to rise.

This trend could spur rate cuts by the first half of 2024, NAB said in a statement.

A strong jobs market has so far given the RBA enough economic headroom to keep raising rates. But the central bank is also targeting some cooling in the space.

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