The decision to raise the cash rate by another 0.25% to a decade year high of 3.85% stunned the market with the overwhelming consensus forecasting this month’s call be another pause.
Instead, RBA Governor Dr Philip Lowe placed a lot of emphasis on the most recent inflation figures.
Notably, the March quarter CPI results revealed a welcome fall in inflation (7%), signalling the worst was over - the peak had been reached in December last year.
Underlying inflation was also at 6.6% - much higher than the RBA's target of 2-3%, and is a band it does not anticipate hitting until 2025.
However, the RBA's monetary policy statement indicated inflation was in line (if not a little better) with the central bank’s forecasts - so, why the u-turn and a rush back to another hike?
In simple terms, the RBA monetary policy board is sticking to script - last month's pause was to stop and smell the roses.
In the post-meeting statement for May, Dr Lowe said the May rate hike was justified by stubbornly high inflation and the tight labour market.
“Goods price inflation is clearly slowing due to a better balance of supply and demand following the resolution of the pandemic disruptions,” Dr Lowe said.
“But services price inflation is still very high and broadly based and the experience overseas points to upside risks.
“The Board’s priority remains to return inflation to target. High inflation makes life difficult for people and damages the functioning of the economy."
He continued to subtly address calls by some to accept a higher rate of inflation.
"If high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later," Dr Lowe said.
With the big-four banks previously expecting the terminal cash rate to peak at 3.60% or 3.85%, yesterday’s surprise begs the question: how high will interest rates go?
Especially since Dr Lowe suggested, “some further tightening of monetary policy may be required.”
Here’s a snapshot of the expert’s forecasts.
Westpac - rate hike cycle is over
Prior to the RBA’s May increase, Westpac economist Bill Evans upgraded the major bank’s cash rate forecast to 3.60% given the March inflation figures.
Yet, Westpac believed its previous terminal forecast of 3.85% would be the better policy approach.
Given the cash rate has now reached 3.85%, Mr Evans expects the RBA to remain on hold throughout 2023.
“Going forward the weakness in the economy and slowing inflation is likely to eventually see the tightening bias fade,” he said.
“Rates will remain on hold for the remainder of the year with rate cuts beginning in the March quarter next year with 100 basis points of cuts over the course of 2024.”
CommBank - 3.85% is the peak
CommBank hit the nail on the head once again, successfully anticipating a 25 basis point increase in May.
CommBank Head of Economics Gareth Aird said the major bank expects the need for further tightening to dissipate from here.
“The economy will slow as the lagged impact of the already delivered rate rises further weighs on consumer spending and by extension inflation,” Mr Aird said.
“If the inflation and labour market data evolve in line or weaker than the RBA’s forecasts we do not think the Board will raise the cash rate again in this cycle.
“Put another way, we see 3.85% as the peak in the cash rate.”
CommBank predicts the RBA may deliver rate cuts in late 2023, as long as inflation falls more quickly than the RBA currently anticipates.
NAB - potentially more to come
NAB Chief Economist Ivan Colhoun said yesterday’s decision to tighten further was finely balanced suggesting that a quick follow up rate rise next month may not be likely, unless upcoming economic data is surprising.
“Today’s decision and tonight’s remarks suggest that the risk remains for the RBA not yet being at the peak of the cycle, with wage pressures or continued acceleration in services inflation a clear and present risk,” Mr Colhoun said.
“That said, the further tightening today and warning of possibly more to come, should contribute to some further slowing in the second half of the year as previous tightening bites harder.”
NAB forecast the RBA to hold at 3.60%, but after Tuesday's announcement, head of market economics Tapas Strickland said more could come.
"It doesn’t take much re-assessment of the risks to get the RBA to move," Mr Strickland said.
"[Economic data] probably points to the RBA thinking they may need to do another 25 or 50 basis points."
ANZ - one last increase to come
ANZ has once again turned with the tide, forecasting a terminal cash rate of 4.10% (previously 3.85% before the May decision was released).
ANZ Head of Australian Economics Adam Boyton said August is the most likely window for any additional move from the RBA.
“Given our own concerns about the stickiness of services and non-tradables price inflation, the robustness in the labour market and the business sector, we will retain a 25 basis point hike for August,” Mr Boyton said.
“That takes our estimate terminal rate (back) to 4.10%.
“We don’t see a case for easing this year, given our views on the economy.”
AMP - rates to remain steady
AMP Chief Economist Shane Oliver predicts the cash rate is at or very close to the top.
“We think that the RBA has done more than enough and we have reached the peak in rates,” Mr Oliver said.
“Continuing to raise rates from here adds to the rising risk of plunging the economy into a recession.
“However, given high inflation, the still tight labour market and the RBA’s still hawkish guidance, the risks are still skewed to the upside for interest rates. However, by year end or early next year we continue to see the RBA starting to cut rates.”
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