‘Bleak signals’: Morgan Stanley joins UBS in forecasting Reserve Bank will hike interest rates in August

In grim news for mortgage holders, another bank is expecting an interest rate hike in August.

American giant Morgan Stanley has followed UBS in predicting the Reserve Bank of Australia will lift the benchmark cash rate at its next meeting, arguing inflation is proving harder to crush than expected.

That would increase the cash rate to 4.6 per cent.

“This complicates the outlook and comes at an inopportune time for equities,” Morgan said in a research note published overnight.

“Whilst inflation is remaining stickier and in services at least still rising, the evidence of some slowdown in domestic facing sectors, like housing activity and discretionary consumption, has been building.”

Inflation was running far hotter than expected in the year to May in data released Wednesday, with markets shocked by 4 per cent growth in consumer prices.

The bank said a hike would make consumers thriftier and add to “bleak signals” in the housing market.

Markets were pricing in a 37 per cent chance of an August rate hike late on Wednesday — meaning they see a good chance the RBA won’t move yet.

The warning comes after RBA Governor Michelle Bullock revealed the central bank considered a rate rise at its May meeting as it fights to bring rising prices under control.

Ms Bullock said she was “very conscious” high interest rates were really hurting some people but said the bank’s focus was on the high inflation causing severe pain in hip-pockets.

“I can’t tell (people) when we will bring interest rates down but I can say that my laser focus and the board’s laser focus is on bringing inflation down and that will help them,” Ms Bullock said.

“I do understand that it affects different people in different ways (but) it is our only tool to bring inflation down.”

The RBA will also look closely at quarterly data due in July which will give a much clearer picture than monthly figures.

The central bank — which has four meetings in the remainder of the year — prefers underlying inflation measures over the headline number published by the Australian Bureau of Statistics.

But there are plenty of banks that are not yet convinced the RBA will move.

Commonwealth Bank head of Australian economics Gareth Aird said the data would test the RBA’s resolve but there would be plenty more data before August.

NAB pushed back their forecast for a rate cut until May 2025, after previously picking November of this year.

“The mix of slow growth and gradual progress on inflation reflects the RBA’s decision to embrace a “lower for longer” approach – a lower rate peak compared to other advanced economies, resulting in a longer period at that peak,” the bank said.

“It is possible the Board will change course and raise rates at its August meeting — especially if the Q2 print exceeds expectations — but with the labour market easing we don’t believe their hand will be forced.”