VIEW: CBA: How High Will The RBA Take The Cash Rate?

CBA note that “an RBA tightening cycle looms and we continue to expect the RBA will deliver the first hike in the cash rate at the June Board meeting. Our central scenario has the cash rate climbing to 1.25% by Q1 23 where it is forecast to stay over the remainder of 2023. We assess 1.25% to be the neutral cash rate and therefore at this stage we believe once the cash rate is at that level it is the logical place for the RBA to pause in its tightening cycle ‑ there is also a significant expiry of fixed rate home loans in 2023 which will create a natural tightening over 2023, even with the RBA on hold. It is possible, however, that the RBA takes policy into contractionary territory; either intentionally to put downward pressure on inflation or inadvertently if the RBA’s assessment of neutral is higher than ours. Our analysis indicates that a cash rate of 2.50%, i.e. in‑line with market pricing, is deeply contractionary and would result in mortgage payments as a share of household disposable income rising to a record high (data we use goes back to 1999). Fiscal policy will play a very important role in determining how high the RBA takes the cash rate - looser fiscal policy than we currently anticipate increases the probability that the RBA takes the cash rate to a contractionary setting. If the RBA commences raising the cash rate later than our June start date that also raises the risk that the cash rate is taken above our estimate of neutral.”