The Reserve Bank of Australia is more likely than not to hold its official interest rates at 4.1% at its next meeting on Tuesday, July 4, according to financial markets data.

Prices of ASX 30 Day Bank Bill Futures on June 29 implied a 72% chance of a pause in the RBA’s interest rate tightening cycle in July, up from a 47% chance on June 16. The change in expectations follows reports of easing inflation pressures in the Australian economy with the monthly CPI indicator showing price rises of only 5.6% in the 12 months to May 2023, lower than market expectations.

The improving inflation picture has been a welcome sign for business and residential borrowers after enduring the central bank’s most aggressive tightening cycle in a generation. Rates have risen 4-percentage points since May 2022.

But that is no guarantee of interest rate relief, as the RBA board has shown in recent months. RBA Governor, Dr Philip Lowe, has led two surprise rate hikes in May and June this year, following a pause in April that was designed to allow the effects of previous rate rises to bite. Any hope for a reprieve from higher mortgage costs for borrowers was proved to be wishful thinking.

Underlying tight conditions in Australia’s labour market, coupled with falling productivity, gave the central bank enough ammunition to keep raising rates, which shocked most observers. In fact, the surprise rate hike in June led economists at the major banks to adjust their forecasts for official interest rates.

Before the June meeting economists at Westpac and Commonwealth Bank had already called the peak at the then official cash rate of 3.85%, while ANZ and NAB expected one more increase to 4.1%.

However, following the surprise hike in June and continued hawkish tones from the Governor Lowe, all four majors tuned their forecasts up: Westpac, Commonweath Bank and ANZ adjusted their peaks to 4.35%, while NAB moved their forecast top of the cycle to 4.60%. All banks expect the peak to be reached in 2023 before varying pathways to lower rates in 2024.

Meanwhile, the US Federal Reserve is set to retain its tightening stance in future meetings, according to its chairman, Jerome Powell. Mr Powell told an audience at the Spanish central bank in Madrid that he expected the “moderate pace of interest rate decisions to continue”.

The divergent outlook for Australian rates compared to US rates has been reflected in the Australian currency, with one Aussie dollar buying US$0.6630, down from US$0.6872 two weeks ago.

‍PLEASE NOTE: INFORMATION CONTAIN IN THIS ARTICLE IS NOT TO BE CONSIDERED AS ADVICE OR A BASIS FOR MAKING DECISIONS. YOU SHOULD CONSULT YOUR FINANCIAL MARKETS SPECIALIST FOR UP-TO-DATE VIEWS ON BORROWING RATES