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Have Interest Rates Peaked? What History Can Tell Us About The RBA's Next Steps

The Reserve Bank of Australia (RBA) recently decided to hold interest rates steady, pausing after ten consecutive rate hikes. This pause has caused speculation on what the RBA will do next. Based on historical trends, we can make predictions on what to expect from the RBA in the future.

The RBA's Future Rate Decisions

While the RBA has indicated that the pause is temporary, its future decisions will likely be based on economic indicators such as inflation, employment, and GDP growth. The RBA aims to keep inflation within its target range of 2 to 3 per cent "on average over time". Therefore, if inflation continues to rise, the RBA may resume rate hikes.

1. Economic Conditions

The RBA has paused rate hikes due to early signs that the increase in rates so far is starting to weigh on consumer spending. Hence, the RBA's future decisions will be influenced by economic conditions, such as consumer spending, housing, and business investment. If these indicators weaken, the RBA may hold off on raising rates further.

2. Historical Trends

Looking back at past cycles, the RBA has typically raised rates in response to rising inflation or to cool down an overheated economy. In the early 2000s, the RBA raised rates to curb inflation, while in the late 2000s, the RBA hiked rates to contain a housing bubble [6]. Hence, based on these past patterns, it is likely that the RBA will resume rate hikes if inflation continues to rise or if there is a housing market boom.

Figure 1: Historical RBA Tightening Cycles

3. Forecasts by Economists

Economists from major banks predict that the RBA will raise rates again by 25 bps to 3.85%. However, this prediction comes with a caveat that the risk of a pause has risen substantially since the last meeting. Moreover, senior economists from Australia's big banks forecast that the cash rate will peak at 3.85% this year, with one predicting it may climb as high as 4%.

Financial markets are predicting that pause will be permanent. In fact, between now and September 2024, financial markets are predicting the RBA will have to cut rates by 50 basis points (0.50%) - see Figure 2 below. Given that the data is indicating inflation has peaked and that the economy is slowing, this appears to be driving expectations that the RBA will cut rates to stimulate growth in the future. This will be a positive for the housing market and act as a catalyst for demand to increase, pushing house prices higher.

Figure 2: Financial market pricing of the cash rate


In conclusion, the RBA's future decisions will be influenced by various economic indicators, including inflation, employment, consumer spending, and housing. Based on historical trends, it is likely that the RBA will resume rate hikes if inflation continues to rise. Moreover, the forecasts made by economists suggest that the RBA will resume rate hikes. However, economists have struggled to predict RBA moves recently and these predictions are not set in stone. The RBA's future rate decisions will ultimately depend on the prevailing economic conditions.

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