Will the RBA hike the cash rate in August 2023? CBA, ANZ, NAB, and Westpac home loan predictions

In an astonishing pivot, the Reserve Bank of Australia (RBA) made a quiet July by holding the official cash rate at 4.10%. Home loans cooled their interest rate rush somewhat, much to the relief of borrowers. 

But another interest rate decision looms on the horizon. With the release of new quarterly inflation figures, the RBA must decide whether interest rates have risen high enough or if household budgets need another kick. 

Let’s break down predictions for the RBA’s 1 August meeting.

In the year to June 2023, headline inflation clocked in at 6.0% – the lowest figure since September 2021 and a slowdown far steeper than expected. This marks the second consecutive quarter that inflation has fallen, a phenomenon called ‘disinflation’. 

So the good news? The RBA is successfully wringing inflation out of the economy. The bad news? 6% is still far from the RBA’s ideal 2% - 3% target. 

According to RBA governor Philip Lowe, whose term ends in September, inflation must come down no matter what, or the consequences could hurt Australians far more than costly home loans.

“Our job at the central bank is to make sure that this period of high inflation is only temporary. It is important that we are successful here,” Lowe explained in a speech in June. 

“High inflation is corrosive and damages our economy. It erodes the value of money and savings, puts pressure on household budgets, makes it harder for businesses to plan and distorts investment. It makes us all poorer and hurts people on low incomes the most.”

But with inflation lower than expected, has the RBA done enough to ensure the slowdown sticks? The last few cash rate decisions have all been close calls: the RBA surprised with every hike or hold. 

“The RBA is very focused on getting inflation down,” says Mozo banking expert Peter Marshall.

“The only thing they can do about inflation is to raise interest rates. So if they think there’s a risk inflation is not reducing as quickly as they would like, they will hit the interest rate button.”

Marshall warns that one more 0.25% rate hike is likely in August. It could be the final stomp required for inflation to come down and stay down. 

“There’s plenty of hard information the economy is coming to a very fast halt and going into reverse within the next few months,” says Marshall. “I would find it really hard to believe the RBA thinks the mountain of negative data appearing right now can be ignored for long.”

“So the logic may be that one more rate rise will do the trick.”

ANZ finds itself the most dovish of the big banks ahead of the August RBA announcement. ANZ projects an extended hold into 2024, when rates may eventually come down, meaning the June rate hike was the final one. 

Commonwealth Bank and Westpac maintain the middle ground by predicting one more rate hike in August, the last for this cycle. This would mean a cash rate peak of 4.35% until 2025. CBA has had the most accurate forecasts for each RBA decision this year, while Westpac has consistently favoured aggressive rate hikes. 

Big Four Bank cash rate predictions – 28 July 2023

NAB, on the other hand, leans the most hawkish. The big bank reckons there will be two more 0.25% additions in August and September. This would push the final cash rate to an eye-watering high of 4.60%. With a low quarterly inflation figure, however, this scenario seems less and less likely.

Latest figures from the RBA suggest that inflation won’t fall to the target band until 2025, though the big banks are more optimistic about a slowdown by 2024. 

Interest rates will only come down when inflation does, so unfortunately, this means home loans may stay costly for another two years. On the bright side, savings account interest rates will remain attractive longer — every raincloud, as they say. 

The RBA will go through some shake-ups in 2024, however. New governor Michele Bullock will have taken over from Philip Lowe, and the RBA will meet less frequently, which could spread out interest rate decisions and delay the pace of any rate hikes, holds, or cuts. 

Marshall warns the changes won’t affect the decision making process: the RBA may retain a tightening bias so long as inflation proves a threat. 

“I don’t think replacing Philip Lowe is going to change things enormously,” he explains. 

“The RBA will still make its decisions based on the views of a group of people. It’ll be a slightly different group of people, so we may get some different decisions, but it’s not going to see an abrupt, ‘Oh, no, we’ve been doing the wrong thing all these years.’”

A significant criticism of the RBA’s aggressive tightening of monetary policy is that there’s a risk the central bank could overdo it. If rates go too high too fast, disheartened and mortgage-stressed Australians may close their wallets altogether, stop spending, and plunge Australia into a recession. 

A recession is another worst-case scenario the RBA tries to avoid. If one were to happen, unemployment would rise, and the cost of living would become unaffordable for many. 

At the moment, employment remains strong and tight, and this is usually the most reliable bellwether for a recession. If people start losing their jobs and businesses start closing, it cuts off the flow of cash in the economy and causes the contraction economists watch out for. 

Recessions are unavoidable parts of the business cycle, of course, and we may experience a minor one in the recovery from inflation. But for now, the danger seems distant.

Need help with mortgage repayments? Your window of opportunity to refinance may be closing. 

Refinancing becomes less and less tenable with every rate hike. This is because rising interest rates not only squeeze and stretch budgets, which can hurt your borrowing power, but high rates also push up serviceability test thresholds. 

Lenders partially assess creditworthiness by evaluating whether borrowers can pay interest rates up to 3% higher than the number they’ve applied for. So if you’re struggling to afford 7% rates and want to refinance to 5%, a mortgage lender will test your finances at rates as high as 8% – a rate which may be too high for you to finance. 

Three of the big four banks have lowered their stress tests because of this problem. Now, instead of 3%, eligible refinancers applying to CBA, NAB, and Westpac may only be assessed at rates 1% above the one they want.  

But your refinancing application will still need to show a good credit score, genuine savings, and a low debt-to-income ratio to be successful, all of which may have gotten harder with the cost of living so high. If you can’t refinance, you risk becoming a mortgage prisoner. 

Instead, jailbreak your mortgage before matters get out of hand. Some crucial early steps you can take on the road to refinancing are:

• Lowering your spending and credit card limits. 
• Clearing excess debt, especially credit card and personal loan debt. 
• Calling your lender to negotiate a lower interest rate. 
• Getting a property valuation done to asses your home equity. 
• Comparing home loans to see if you could switch and save. 

If you’re already preparing a refinancing application, check it for these red flags to ensure you aren’t giving the wrong impression.

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