Millions of home owners are breathing a sigh of relief this week after the Reserve Bank held interest rates for the second month in a row, sparking predictions of an extended pause.

Economists say central bankers have turned the page after 12 rate hikes since May 2022, and have now entered a new phase of the inflation fight defined by a much more patient mindset.

The shift has raised the prospect that the RBA’s next rate move could even be a cut, according to Westpac chief economist Bill Evans, who predicted on Thursday that the rate hold will persist until a prospective cut in September next year.

“It’s very likely that we’ve seen the peak in interest rates at 4.1 per cent,” Mr Evans said.

“Once we start to see the rate cuts coming through, we expect them to be relatively rapid.”

Interest rates freeze defined by inflation uncertainty

Forecasters at three of Australia’s four major banks have now called an extended pause and are expecting cuts to occur at various stages next year – though the outlook is mired in uncertainty.

That’s because neither market economists or central bankers know where prices will land after a global disinflation in goods prices runs its course against a backdrop of sticky services inflation.

As explained previously, prices for key goods such as furniture, appliances and electronics are now falling after huge spikes during COVID-19 – that’s driving a welcome fall in headline CPI.

But the RBA remains concerned that a mixture of rising wages growth and low productivity will push prices for services higher, making it much harder to get headline inflation back down.

BIS Oxford Australia head of macroeconomic forecasting Sean Langcake said the RBA is willing to wait more than a year for annual inflation to fall from 6 per cent back to its 2 to 3 per cent target.

In fact, forecasts published on Friday showed central bankers extending the timeline for inflation to reach the target band by six months, from June 2025 to December 2025.

Most of the work will be done in 2024, however, with inflation slated to ease to 3.25 per cent.

“Inflation is very close to target by the end of 2024,” Mr Langcake said. “They’re expecting a fair bit of progress to be made next year.”

Another key uncertainty facing the RBA is how rapidly demand will slow across the economy in response to the 4 percentage points in rate hikes passed to date, which Mr Evans explained could have implications for the transmission of wages growth into future inflation.

As Friday’s forecasts showed, the RBA is now expecting the economy to post its weakest growth in three decades – other than COVID-19 – over the next few years.

Central bankers have softened growth forecasts to just 0.9 per cent in 2024, compared to the 1.6 per cent that was predicted back in May.

Cuts on the horizon

It will be a while before these uncertainties play out, but what has become increasingly clear is that with a rates peak comes the prospect of cuts on the horizon.

Commonwealth Bank is now forecasting the first rate cuts in March, while Westpac thinks it will take a bit longer and is predicting September next year.

In the near term, however, the risk points towards the potential for more hikes if inflation ends up being more stubborn than anticipated in the September and December quarters, so it’s worth taking these forecasts with a grain of salt.

Mr Langcake said that the RBA may even pause for a while and then opt for another rate rise if central bankers feel another push is needed to get inflation from the mid-3 per cent range back down to their target towards the end of next year.

“You could still make the case that inflation won’t come down quickly enough,” he explained.