UPDATE: The RBA has announced a 0.25% increase in March, taking the cash rate to 3.60%.
This comes despite signs inflation may have peaked, with ABS monthly annualised inflation data revealing a drop of one percentage point to 7.4% in January.
Post-February cash rate decision, the RBA all but locked-in the prospect of future cash rate increases, noting it expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary.
“High inflation makes life difficult for people and damages the functioning of the economy,” February’s post-meeting statement read.
“And if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later.”
CommBank Head of Australian Economics Gareth Aird said economic data released since the RBA February cash rate decision contradicts the Board's hawkish tone.
“That data comprises GDP, wages, employment, unemployment and CPI,” Mr Aird said.
“The recent data indicates that the RBA may now be tightening policy into an economy that is already showing sufficient signs of softening from an output, prices and employment perspective. That is our assessment. But the Board won’t arrive at that conclusion yet.”
AMP Chief Economist Shane Oliver echoed similar, noting that RBA rate hike expectations are getting too hawkish.
"Economic data can run hot and cold and seasonal adjustment issues may be playing a role but taken together the run of recent data suggests that demand is cooling and inflation has peaked," Dr Oliver said.
"As such we remain concerned that the RBA over-reacted to the December quarter CPI release in adopting a very hawkish stance over the last month.
"Our view [AMP] is that the RBA has likely already done enough to cool growth and inflation and so should pause to allow more time for lags to work particularly given the run of soft recent data.
"However, the extent of the RBA’s recent hawkishness – flagging that “further increases in interest are likely to be needed” - means that recent data is unlikely to have been enough to prevent it hiking again at its meeting on Tuesday, so we are expecting another 0.25% hike taking the cash rate to 3.6%."
The recent run of Aust data has shown: consumer conf at recession levels, slower than expected wages grth, retail sales flat since Sep, slowing Dec qtr GDP grth with flat private demand, softer than expected Jan CPI…maybe RBA rate hike expectations are getting too hawkish.
— Shane Oliver (@ShaneOliverAMP) March 1, 2023
CommBank economists expect the RBA to lift the cash rate in March to 3.60%, with a peak cash rate of 3.85% - unlike Westpac, NAB and ANZ economists which expect a peak of 4.10%.
NAB economists forecast 25 basis point increase
NAB Head of Market Economics Tapas Strickland detailed February’s RBA minutes post-meeting point the way forward for the RBA in March.
“The Minutes note on two occasions that given interest rate increases, required mortgage payments would rise to a record high as a share of disposable income,” Mr Strickland said.
“This suggests to us that despite likely further interest rate increases in the next few months (as is NAB’s call), we are getting nearer a peak in the cash rate, and that the risks of overtightening will start to grow.
“The risk of overtightening suggests moving by 25 basis points increments is more prudent than moving by 50 basis point increments.”
NAB economists anticipate the RBA to continue policy tightening, lifting the cash rate a further 0.25% to 3.60% in March.
Westpac economists anticipate 25 basis point increase
Westpac Chief Economist Bill Evans said the RBA appears locked in to further hikes in the cash rate in both March and April.
“The revised forecasts and March quarter inflation report are likely to require a further hike in May,” Mr Evans said.
Mr Evans believes a pause in the cash rate is credible in June, given concerns about a wage-price spiral easing following the December quarter Wage Price Index, slowing demand and the state of the cash rate - which Westpac forecast to hit a peak of 4.1%.
Westpac economists expect the RBA to continue its current trend, lifting the cash rate a further 0.25% to 3.60% in March.
ANZ economists forecast 25 basis point increase
ANZ economists echoed the sentiment of CommBank’s Gareth Aird, noting while the weak wages result raises the risk the RBA may feel able to pause in its tightening cycle earlier than expected, another 25 basis hike at the March board meeting is expected.
ANZ economists are therefore anticipating the RBA to life the cash rate by 0.25% in March to 3.60%.
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