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

Despite hiking the cash rate an impressive 3.00% over the course of 2022, the Reserve Bank of Australia has yet to win its war against inflation. 

But while the rate rises haven’t dampened consumer price growth, they have smothered property values and home loan borrowing power, since variable mortgage interest rates shift in line with the cash rate. These effects have made rate rises a significant cause of the rising cost of living.

Relief may not be in sight quite yet, with CBA, Westpac, NAB, and ANZ all budgeting a 0.25% hike in February, but a slowdown to the pace of rate hikes may come sooner than thought.

Let’s unpack rate predictions for the 7 February RBA meeting.

Headline inflation clocked in at an alarming 7.8% between December 2021 and 2022, far outside the RBA target band of 2 - 3%, but a little under the 8% the RBA predicted. With such runaway growth, most economic pundits agree the RBA will feel it has no choice but to move the cash rate again in February. 

While last year saw the central bank deliver several hefty 50 basis point hikes, it pivoted in October to a calmer, more measured approach: 25 bp apiece. All four big banks predict the RBA will make another 25 bp move on 7 February, lifting it to 3.35%. 

This movement would then cascade into another round of rate increases to variable home loans, especially for customers borrowing from the big four.

However, while another movement is almost certainly on the cards for early 2023, there’s disagreement over whether we’re nearing the ‘terminal rate’, also called the cash rate peak. In theory, the RBA will hold the cash rate at this ideal summit until inflation eases then lower it back again with a series of cuts. 

But with inflation still rip-roaring through the economy, economists argue we haven’t yet reached the top. Interest rates will go higher in 2023, but how much higher will they go?

When justifying the pace of rate hikes, RBA governor Philip Lowe has consistently cited high employment, consumer spending, and household savings as crucial safety buffers. In his view, these all allow borrowers to absorb the additional interest on their mortgage repayments without driving them into mortgage stress, or the worst case scenario: arrears. 

However, many Australian households have fallen into mortgage stress (meaning they’re spending more than 30% of their income on repayments). The more people fall behind on their home loans, the more likely they are to close their wallets altogether and plunge the economy into recession.

Indeed, CBA has issued a per capita recession warning for later in 2023 if rate hikes go too far. 

This warning hinges on whether the cash rate peaks at 3.35% in February or if there’s further still to go, as NAB, ANZ, and Westpac believe. (CBA concedes there’s a chance the RBA may hold off on a decision in February in favour of moving in March instead, but either way, it pegs 25 bp as the final rise for this tightening cycle). 

ANZ and Westpac, on the other hand, believe that the cash rate will peak at 3.85% by May 2023. NAB finds the middle ground with a 3.60% peak in March. All paths set out by the big banks include hikes made in 25 bp increments.

Cash rate peak predictions from the big banks (31 January 2023)

If CBA’s predictions hold true, February’s decision could be the last we see for the year – at least until the RBA releases the brakes with a rate cut. 

However, if NAB, ANZ, and Westpac are correct, overly indebted households could be in serious trouble soon.

The last time the RBA slashed the cash rate was in November 2020, bringing it to an all-time low of 0.10%. Lowering the cash rate encourages cash flow in the economy and stimulates activity, and is usually done in response to decreased consumer spending levels, dragging inflation (lower than 2%), or a recession. 

Consumer spending has already dropped significantly in the wake of the silly season, with retail trade reporting its first monthly fall for the year in December 2022. 

Unemployment has also begun to tick up, ever so slightly, and this bellwether is critical to watch. Households can afford rate hikes and inflation so long as they have a steady stream of income: without it, they’re sitting ducks in a storm. 

In response to these metrics, CBA expects 50 bp worth of rate cuts later in 2023, right when inflation is projected to ease off. These rate cuts will likely continue into 2024 as the economy levels out again. While the big bank doesn’t specify which months we’ll see the cuts, it suggests they could start sometime in Q4, which begins in August 2023 – only eight months away.

NAB lays out a more concrete path for rate cuts, starting in December 2023 and continuing into 2024.

This would ultimately shave 75 bp in a year and half’s time.

Not every suburb experienced a value decline in response to rate hikes: a few have even boomed with first home buyers. For the savvy investor seeking capital growth, it seems there are still plenty of places to check out (including these hottest 100 suburbs).

Borrowers, in the meantime, will likely hope for rate cuts instead. But don’t overlook the rate rises between now and then. If you’re struggling with your repayments, some helpful strategies to take include:

• Making use of an offset account. 
  
• Making free extra repayments (if you can).
  
• Calling up your lender and negotiating for a lower interest rate. 
  

And if these aren’t good options, it could be time to ask yourself about refinancing. 

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