When will the RBA cash rate peak, and what will it be?

As expected, the RBA yesterday announced a 25 basis point increase to the cash rate, the eighth consecutive rise, bringing the cash rate to a 10-year high.

With a 3% (300 basis point) increase since it began in May, the pace of increases is at a 28-year high.

In his statement on the decision, RBA Governor Dr Philip Lowe reiterated that the hikes are a necessary step to combat inflation, currently sitting at 6.9% over the year to October.

"The board's priority is to establish low inflation and return inflation to the 2-3% range over time," Dr Lowe said.

Dr Lowe emphasised the uncertainty of the situation, and said that future movements would be dictated by economic developments.

"The board expects to increase interest rates further over the period ahead, but it is not on a preset course," Dr Lowe said.

"It is closely monitoring the global economy, household spending and wage and price-setting behaviour.

"The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market."

CBA - 3.35% peak by February 2023

For CBA's head of Australian economics, Gareth Aird, Tuesday's movement was enough for him to revise his previous prediction that 3.1% would likely be the highest the cash rate would reach.

"The tweak in forward guidance was not as material as we anticipated and as a result we shift our risk case to our base case," Mr Aird said

"We now expect one further 25 basis point rate hike in February 2023 for a peak in the cash rate of 3.35%."

CBA now believes the "risk case" is that the cash rate will peak at 3.60% some time next year.

ANZ - 3.85% by May 2023

Head of ANZ economics David Plank said the bank sees "nothing in the RBA's statement that challenges our expectations that the cash rate target will rise to 3.85% by May 2023.

"We think inflation and wages growth will prove to be too high for the RBA to stop hiking anytime soon," Mr Plank said.

"We expect a 25 basis increase in February after the fourth quarter consumer price inflation [is revealed] and with the extension of the RBA’s forecasts out to mid-2025 still expected to show inflation at 3% or higher.

"Wage data in mid-February should then make the case for another 25 basis in March."

AMP - 3.10% is the peak

Shane Oliver, Chief Economist at AMP Capital, believes the cash rate is not likely to go up much further.

"With the cash rate having reached our peak forecast of 3.10%, we remain of the view that the RBA is at the peak - or if not then it's close to it," Mr Oliver said.

"By early next year we expect that the combination of a sharp slowing in domestic demand, increasing signs that inflation has peaked and sharply weaker global growth which will in turn also drive inflation down will enable the RBA to keep rates on hold for an extended period.

"By late next year or early 2024 we expect the RBA to start cutting rates."

Westpac - Increases in the first half of 2023

Westpac economists anticipate further hikes in the first half of next year.

Bill Evans, Chief Economist at Westpac, said Dr Lowe's emphasis on inflation was encouraging, and that this focus would likely mean rate rises would continue.

"Westpac expects that the inflation report for the December quarter will signal the need for further tightening and the board will act on its tightening bias with a 25 basis point increase in February," Mr Evans said.

He went on to say that Westpac also anticipates conditions to adjust in time for there to be no increases in the second half of the year.

"Our forecast of 1% growth in 2023, partly contingent on our view on the Bank’s tightening cycle and the difficulties in wringing inflation out of the system, implies that the economic slowdown will be particularly intense in the second half precluding the need to tighten further," Mr Evans said.

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