The question on everyone’s lips is, will the RBA simply look at the headline inflation number? Or will they take into consideration factors such as oil prices and productivity being the main driver, factors that consumers have no influence over?

Another big factor is consumer confidence, if this remains low based on surveys, the RBA is more inclined to leave rates on hold.

What’s interesting is the differing opinions we are seeing amongst the experts, I came across an article this week covering the opinion of former RBA heavy hitter Luci Ellis, who is now chief economist at Westpac, she believes rates have peaked, and the next move the RBA make will be down. Given Luci spent 30 years at the RBA and has only recently left, you have to think her opinion holds weight, key points below:

The next RBA rate move will be down, says Westpac

Westpac’s economics team – which now has former Reserve Bank heavy-hitter Luci Ellis at the helm – expects the central bank to keep the official cash rate steady at 4.1% until June next year, after that, they expect the RBA to start cutting interest rates, and say the official cash rate is likely to fall to 3.1% by June 2025.

This month, RBA governor Michele Bullock expressed concern that the escalating conflict in the Middle East could keep oil prices and inflation higher for longer, causing people to adjust their expectations. She said the “million-dollar question” facing the bank was how people’s inflation expectations responded to higher prices for common items such as petrol, food, and accommodation.

At present, consumer surveys indicate that the respondents expect prices to moderate in the next few years, which is a vote of confidence in the RBA’s ability to steer inflation back to its target range.

According to Westpac, consumer expectations for inflation eased slightly over the three months to October, but expectations for wages growth ticked up a touch. Neither will be posing great concerns for the Reserve Bank with inflation expectations heading in the right direction and wage expectations still looking relatively benign.

It notes that consumer sentiment remains deeply sombre, and people are finding little comfort either from the pause in the RBA’s interest rate tightening cycle, or from declining inflation. The constant cash-flow hits from interest rate rises may have stopped for many, but consumers remain on high alert for further rate rises. At the same time, risk aversion – particularly for middle-income, middle-aged and mortgage-belt consumers – remains close to record highs.

All else being equal, these high levels of aversion could be expected to see consumers act more conservatively with their finances, favouring saving over spending, and aiming to keep debt levels low rather than increase leverage.

Westpac highlights the important role that large savings buffers built up during the coronavirus pandemic have played in supporting consumer spending, despite the slump in consumer sentiment. Based on historical relationships, current reads in sentiment could have delivered a very large contraction in per capita spending, Instead, while spending has been weak, it has been trimmed rather than slashed, due to high savings levels, and we all know these savings levels are diminishing.