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Will the Reserve Bank hike interest rates in June? The big banks can’t agree

The prospect of another painful interest rate hike is looming over already stretched family budgets heading into June, but will the RBA actually push up mortgage bills again?

According to Australia’s biggest bank, the answer is no.

Commonwealth Bank economists say an RBA reprieve is on the horizon, with clear signs the economy is slowing slated to pause the cash rate target at the current 3.85 per cent.

The bank’s chief economist Gareth Aird said on Friday the chance of a hike is only 10 per cent.

“The RBA June board meeting [on June 6] is not currently live,” he said on Friday.

“The economic data released since the May board meeting does not support another rate hike in June.”

Key metrics ‘weaker’

Mr Aird said figures published since the RBA published its last set of forecasts in May show key metrics on unemployment and wages are performing “slightly weaker” than they had expected.

And because the board had said that more hikes may be required, based on the strength of the economy, that suggests interest rates will stay where they are for the time being, he said.

“The board is willing to raise the cash rate again,” he said.

“But another rate increase would require the economic data, particularly around inflation, GDP, the unemployment rate and wages/unit labour costs, to come in stronger than the RBA’s updated forecasts.”

Westpac chief economist Bill Evans also predicted a pause in June, though he says the move is “finely balanced” amid risks that higher services inflation could derail RBA plans.

But despite an ever mounting pile of evidence that the economy is cooling down, including new figures on Friday revealing a stagnation in retail spending growth, not all the experts agree.

Indeed APAC economist Callam Pickering said retail sales have now “ground to a halt”, with households on average now consuming fewer retail products than they were last year.

However, he believes the RBA will still move rates higher because inflation, particularly for key services like utilities and rent, could turn out to be more persistent than expected.

“In the near-term, it appears more likely than not that the RBA will continue hiking rates,” he said.

Case for a hike

The economists at National Australia Bank (NAB) agree, predicting at least two further rate hikes that will take the cash rate target from 3.85 per cent to 4.1 per cent.

There’s even a “strong risk” the RBA will take rates to 4.35 per cent by August, NAB economists stated.

“The RBA continues to see inflation moderating but remaining above [the] target band until 2025,” they said.

“We judge this to be at the very limit of the ‘reasonable timeframe the board will tolerate for a return to a target, likely necessitating at least one more [interest rate] rise.”

ANZ Bank economists are also predicting rates will peak at 4.1 per cent by the middle of 2023, saying the “devil is in the detail” when it comes to the recent spate of economic data.

Those figures showed that unemployment is starting to rise, though still historically low, while wages growth has picked up to a decade high.

And because the RBA said at its May meeting that higher wages growth could become overly inflationary without a subsequent rise in productivity, ANZ economists state that rates will need to rise higher to compensate.

“A (very) small increase in productivity would seem possible in the March quarter but, given the strength in hours worked in April, it is difficult not to foresee a fall in productivity in June,” they said.

“That would keep yearly productivity growth negative, and a long way from the pre-pandemic trend.”

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