Part four – What next for rates and inflation?

Part four – What next for rates and inflation?

Inflation is still above target and the RBA has committed to prioritising inflation above all else, so that bodes for more interest rate increases in the short term. However, there could be a natural brake on the economy coming up in 2023 which will likely put a hold on rates before sending them in reverse in late 2023 / early 2024.

The cash rate after the October 2022 RBA meeting sits at 2.6% which is back towards a neutral setting. This equates to home loan rates of about 4.45% for most people once the latest increase is passed on. The latest figures show a slight decline in inflation from 7% in July to 6.8% in August. This could account for the latest 0.25% increase in contract to the monthly 0.5% increases of recent months. Inflation will continue to be above the RBA’s target of 2% to 3%. The RBA has recognised that much of this is external to our economy, but reiterated its intention to focus on stifling inflation ahead of growth. Their forecasts are for inflation settle at 4% over 2023 and 3% over 2024. Based on the RBA’s latest statement, they are also eyeing the labour shortage and the resulting increasing wages as another potential local source of inflation to get ahead of.

There is a slight range in the interest rate forecasts. Some, such as CBA and AMP, estimate a peak at our current 2.6% on the low end, whereas at the higher end, the peak is expected to be 3.35% by December by the likes of Macquarie. NAB forecasts are sitting at 3.1% for all of next year. Either way, we are likely looking at at least one or two more increases between now and February 2023.

After 2023 however, is when we will start seeing the beginning of the effects of the first of the 2022 increases. That aforementioned time lag between rate increases and effects will begin to kick in. In fact, a recession could well be an unwanted side effect of all this inflation and rate increases. Be prepared for a potentially more subdued 2023. This would likely lead to the rate cuts forecast for 2023. We have already seen the leading indicators of this in recent fixed rate decreases.