A new month is here and that means that the next Reserve Bank of Australia meeting is just around the corner.
Next week, the central bank will have its second meeting of the year and is widely expected to increase interest rates yet again.
According to the latest 30 day interbank cash rate futures, the market is pricing in an 81% probability of a 0.25% increase in the cash rate to 3.6%.
Unfortunately for borrowers, the pain is unlikely to stop there, with the central bank expected to continue raising rates to combat inflation. Current futures contracts indicate that rates will continue to rise until they peak at 4.275% in November.
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Interest rate relief on the way
The good news is that the economics team at Westpac Banking Corp (ASX: WBC) believes that rates will start to ease back in 2024.
According to its latest weekly economic report, the banking giant is now predicting a peak cash rate of 4.1% later this year and then a total of seven interest rate cuts across 2024 and 2025.
Starting from the March quarter of 2024, these cuts are forecast to bring the cash rate down by 175 basis points to a low of 2.35%.
Westpac's chief economist, Bill Evans, commented:
At 4.1%, the cash rate will be in deeply contractionary territory and a pause will be appropriate. The decision to pause will be with a reasonable view that the tightening cycle has peaked. Westpac concurs and expects that the next move in rates beyond mid–2023 will be the beginning of an easing cycle in the March quarter 2024.
While we expect the economy to stagnate in the second half of 2023, there will not be sufficient progress in bringing inflation into line with the target before the end of 2023 to accommodate earlier rate cuts. We expect inflation in Australia to still be around 4% by end 2023, falling to 3.0% by end 2024, allowing a policy response to a stagnating economy by the first quarter of 2024.
Over the course of 2024 and 2025, we see 175bps of cuts to a low of 2.35% where the cash rate is expected to settle, with growth at trend and inflation at the top of the 2–3%yr range.
