Though not entirely shocking, it still delivered a blow to many earlier this month—and no, we’re not talking about the news that Starburst has been discontinued in Australia.

Citing inflation, a tight labour market with expected wage growth and the need for ‘well anchored’ medium term inflation expectations to remain, the RBA increased the cash rate again by another 0.5%, taking it to 1.85%.

And it looks like there’s further rate hikes to come, with the market forecast taking peak interest rates up to 3.25% by March’ 23 before moving down to 1.75% later in 2023. CBA’s economics team have published a slightly less hawkish prediction, forecasting increases of 50 basis points in September and 25 basis points in November to close out the year at 2.60% and remaining on hold before easing in the latter part of 2023.

The RBA’s rapid rate hikes reflect a desire to bring demand back into line with constrained supply and to contain inflation expectations by reinforcing its commitment to its inflation target of 2-3%. Right now, with inflation at 6.1% (the highest recorded since 1990), the RBA’s stance is that it will do whatever is necessary to return to its inflation target, with banks likely to pass on continued rate hikes to customers.

But how credible are these predictions when less than a year ago the RBA announced it didn’t expect rates to begin to rise before 2024 based on their then forecasts? With the realisation they got it wrong on inflation, the RBA changed tune quickly and is now talking about the worst case scenario to contain inflation expectations.

So with that in mind, how high will interest rates really go? On the back of softening (but still high) inflation numbers and below anticipated wage growth, market expectations have decreased significantly. Estimates for the year ahead have changed dramatically in just the last few months. Recent data shows that on June 14, market expectations of the RBA cash rate peak was 4.25% by May 2023, only for the estimate to be revised to 3.25% in July. The new expectations are a whole 1% lower, with some lenders reducing fixed and even variable rates.

With global supply bottlenecks easing (e.g. reduced delivery times, work backlogs clearing, lower freight costs, lower material prices, and falling input and output prices), inflation pressure should start to ease. If we look to the US (scary proposition at times, agreed) core inflation is showing signs of having peaked there at 9.1%. Economically, Australia appears to be trailing the US by about six months, meaning that inflation could peak here later this year—though at a less bewildering number. Watch this space!