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Bank economists have priced in another cash rate hold in May but expect the central bank to readopt hawkish language.
The Reserve Bank of Australia (RBA) has been predicted to maintain the official cash rate at 4.35 per cent ahead of its May monetary policy meeting; however, economists expect the board to adopt a hawkish stance once again.
Following the March monetary policy meeting, the RBA was believed to have adopted a “neutral” or “near-neutral stance” on monetary policy based on the shift in language and lack of discussion on potential movements in the cash rate.
Economists from Australia’s big four banks and the market at large are seemingly in agreement that the cash rate will not move in May; however, they believe the March quarter 2024 inflation data may cause a change in the board’s language in its next Statement on Monetary Policy (SoMP).
The Consumer Price Index (CPI) data released by the Australian Bureau of Statistics (ABS) on 24 April revealed that while inflation continues to ease annually (down to 3.6 per cent from the December 2022 peak of 7.8 per cent), the quarterly inflation rise was stronger than expected, at 1.0 per cent (up from 0.6 per cent the previous quarter).
The quarterly inflation data also elicited talks of the RBA potentially raising the cash rate once again, as heard from Judo Bank’s chief economic adviser Warren Hogan, who said that the bank’s forecast has shifted to rates peaking at 5.1 per cent by the end of 2024.
However, Hogan said that there is still a chance that the RBA will not increase rates in the latter half of the year and opt to continue holding the cash rate.
Commenting on the RBA’s potential action, ANZ’s economics team said while they don’t expect the RBA to “explicitly discuss a rate hike”, the communication after the rate decision will be more hawkish than it was in March.
“Following the stronger-than-expected 1Q CPI print, the RBA will revise up its near-term headline and trimmed mean inflation forecasts in the SoMP,” ANZ’s economics team said.
“We also expect a hawkish shift in the tone of the post-meeting statement, particularly in the all-important final paragraph and in the inflation section. We’ll be looking for the board to call out the risks around sticky services inflation, in particular.”
Westpac Group chief economist Luci Ellis said the RBA is on hold until inflation falls further and that a ”scenario necessitating a rate hike is not impossible, but it is unlikely, and it would only take shape later in the year”.
“With the inflation surprise in the March quarter and some further upside possible in the June quarter, the outlook for rate cuts in Australia has been pushed out. The timing of expected rate cuts in the United States has also been pushed out,” Ellis said.
“Could they hike? Not yet, and probably not given the current run of data. The language following next week’s meeting could be more hawkish. In the end, though, the Board will and should remain forward-looking. We continue to expect the next move to be a cut, down the track.”
Furthermore, Gareth Aird, Commonwealth Bank of Australia’s (CBA) head of Australian economics, said that the RBA board “may consider” the case to raise the cash rate in May.
“In which case, the board may opt to revert to an explicit tightening bias in the [SoMP] accompanying the decision,” Aird said.
“But it’s probably not a necessary move given the current wording in the board’s neutral bias gives the RBA full optionality around its next policy move.”
Aird said that while the latest inflation data was “a little firmer” than the central bank anticipated, he believed that it’s not “sufficiently strong” for the RBA to begin tightening policy again.
On the back of the March CPI data, the major banks have pushed forward their forecasts for a potential rate cut to the November monetary policy meeting.
[RELATED: Economist predicts rate hikes to resume in August]
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