Big bank changes RBA rate call as cost pressures ease

Westpac is the last of the big four banks to hang onto its rate rise call, with two more hikes pencilled in for the year.

Recently released GDP data and NAB's business survey, published on Tuesday, showed momentum in the economy has slowed, NAB's chief economist Sally Auld and head of Australian economics Gareth Spence said in a research note.

"The backdrop for the RBA when we look back to February - when they started hiking - was one of growth above its trend pace, or its sustainable pace, with the economy operating above capacity and inflation above target," Mr Spence told AAP.

"The backdrop on those activity indicators has changed a bit."

Although the NAB survey showed business conditions improved 10 index points to minus 14 in May, conditions and confidence remained significantly softer than at the start of the year, before the RBA's three interest rate rises and the war in Iran.

Inflation pressures as a result of the blockade of the Strait of Hormuz were not as strong as initially feared.

Price and cost growth also eased in May, in part due to lower fuel prices and the federal government's excise cut.

Purchase cost growth eased from 4.5 per cent in April to 2.6 per cent, while growth in final product prices halved from 1.8 per cent to 0.9 per cent.

"We haven't seen as much of that cost shock in a broad-base sense," Mr Spence said, noting growth had been stronger in the agricultural sector because of its heavy reliance on diesel and fertiliser.

Capacity utilisation, a key measure watched by the RBA, slipped below 82 per cent for the first time in more than a year.

With interest rates back in restrictive territory, economic activity slowing, the labour market softening and capacity pressures easing, the RBA will have more confidence to wait and see whether inflation starts to moderate beyond mid-year, Mr Spence said.

Household spending was also softer than where it was expected to be at the end of 2025, he said.

Consumer confidence, an approximate forward indicator of spending, fell 2.9 per cent at the start of June, according to the Westpac-Melbourne Institute consumer sentiment survey.

"Cost-of-living issues came back with a vengeance in June," Westpac head of Australian macro-forecasting Matthew Hassan said.

Tax changes in the federal budget produced a noticeable shift in how consumers viewed property as a potential investment.

The share of respondents nominating real estate as the wisest place for savings fell from 9.2 per cent to 4.5 per cent, while the share who thought paying down debt was the wisest option was up 5.2 percentage points to 27 per cent.

Falling property prices would also dampen consumption as a result of a softer wealth effect, when rising household wealth as a result of higher home values makes people more confident to spend, Mr Spence said.

The total value of homes in Australia rose 2.5 per cent to $12.8 trillion in the March quarter, down from a rise of four per cent in the December quarter, according to Australian Bureau of Statistics figures.

With forecasters increasingly reining in rate hike predictions, some lenders have already started cutting fixed home loan rates. 

ANZ cut two- and three-year fixed home loan rates by up to 0.1 percentage points on Friday, while challenger lender Macquarie cut its three-year fixed rate by half a percentage point.

While the cuts were modest, they were enough to put Macquarie and ANZ in front of their big bank competitors when the majority of the market was still trending up, Canstar data insights director Sally Tindall said.