Could the Reserve Bank be finished hiking interest rates?

That’s the hope of many home owners after RBA governor Philip Lowe surprised analysts this week when he suggested the cash rate target may have peaked.

“It is possible that some further tightening will be required to return inflation to target within a reasonable timeframe,” Dr Lowe said.

“Whether or not this is required will depend on how the economy and inflation evolve.”

It’s not the first time the RBA has cast uncertainty over whether more rate hikes will be needed, but Dr Lowe has previously maintained a more aggressive tone in earlier public appearances.

And after more than a year of rate hikes that has added more than $1000 to monthly repayments on a typical $500,000, 25-year home loan, home owners are hanging off Dr Lowe’s every word for clues about whether they’ll be squeezed even harder in coming months.

Commonwealth Bank senior economist Belinda Allen said Dr Lowe’s use of the word “possible” was key heading into pivotal central bank meetings in August and September.

“This word was not included in the July board statement and could suggest the RBA is less convinced further tightening is required,” she said.

“This shift in language further amplifies the importance of the data flow between now and the August board meeting.”

Clear timeframe

Oxford Australia head of macro-economic forecasting Sean Langcake said Dr Lowe’s speech went some way to clearing up a key uncertainty about the outlook for rates.

Previously, there have been questions about whether the RBA is comfortable with a mid-2025 timeframe for getting inflation back to target, which is implied by its current forecasts.

“We’ve known their forecasts don’t have inflation coming back down to target until mid-2025,” Mr Langcake said.

“The new part was he [Dr Lowe] made it sound as though that’s an outcome they’re happy with.”

After the July pause, Dr Lowe said on Wednesday that the RBA was “very conscious” that the record-breaking rate hikes it has passed to date are yet to take their full effect.

“The full effects of the tightening to date have not yet been felt,” he said.

“It takes time for households and businesses to adjust their spending and investment plans, and there are still significant resets of low fixed-rate loans to come.

“Given the lags, economic growth is expected to be subdued over the next couple of years and it will take time for inflation to return to target.”

That’s been interpreted as a sign that the RBA may continue to pause.

Economists tip another hike

But to be clear, a wide range of economists still think the most likely outcome is another rate hike in August or September.

That’s because inflation, though easing, is still far above the RBA’s 2-3 per cent target band.

Commonwealth Bank predicts a rate peak of 4.35 per cent (one more hike) and others such as ANZ Bank and NAB foreshadow a 4.6 per cent peak.

But following Dr Lowe’s comments this week the probability of an extended pause has risen, with inflation data for the June quarter due later this month set to be pivotal for rates.

The RBA paused in July to wait for the new data, so if price growth continues to ease then its possible central bankers decide to keep rates on hold again in August, delivering a reprieve.

Mr Langcake said that was possible, but that it was more likely the RBA would “find something” in the next round of inflation data that would justify another rate hike.

“There’s very much a non-zero chance that they’re done, but our central forecast is that they get to 4.6 per cent … there is still a reasonable possibility that 4.1 per cent is the peak though,” he said.

“You don’t have to stretch your mind too far to see 5 per cent, either. We’re in a very subjective world at the moment.”