The Reserve Bank of Australia’s (RBA) monetary policy board is set to make its next cash rate call this afternoon (Tuesday, 4 April), to be influenced by the latest economic indicators.
Since commencing its tightening cycle in May 2022, the central bank has stressed the importance of containing inflation, which remains well above its target range of 2–3 per cent.
But the most recent consumer price index (CPI) has pointed to a marked decline in annualised inflation, from 7.4 per cent in January to 6.8 per cent in February.
Annualised inflation is now 1.6 per cent lower than the peak of 8.4 per cent in December 2022.
Retail sales also grew just 0.2 per cent in February, down from a 1.8 per cent rise in January, providing further evidence of weakening consumer sentiment.
However, labour market conditions remain strong, with the seasonally adjusted unemployment rate falling from 3.7 per cent in January to 3.5 per cent in February.
Business conditions have also withstood market volatility, with NAB’s monthly business survey suggesting business conditions remain well above the long-run average.
According to the Bank of America (BofA), the RBA won’t be deterred from hiking rates for the 11th consecutive month.
“Overall, the data point to an economy that is slowing down, but the weakness is unlikely materially worse than what the RBA was expecting a month ago,” the global investment bank noted in a statement.
“Meanwhile, the February inflation print adds to the evidence that inflation peaked in 4Q 22. However, at 6.8 per cent year-on-year, [it] is still very elevated.”
“…On net, we do not think the data has slowed enough to bring forward the timing of a pause to next week,” BofA added.
BofA added recent volatility in the global banking system would not form part of the RBA’s determination, claiming “market pressures have eased”; peer central banks have hiked rates amid turmoil; and the Australian banking sector is “largely insulated” from contagion risks.
As such, BofA is projecting one last 25 bps hike, taking the cash rate to a peak of 3.85 per cent. The investment bank had previously tipped a terminal rate of 4.1 per cent.
But other analysts are forecasting a pause to the RBA’s tightening cycle, with economists from three of the four major banks expecting the RBA to hold the cash rate at 3.6 per cent.
According to Frank Uhlenbruch, investment strategist at James Henderson Australia, the RBA will likely take the “pragmatic path” and leave monetary settings unchanged.
However, this won’t signal an end to the tightening cycle.
“…We look for the RBA to pause and wait to see how the economy responds to the quickest and largest tightening in monetary conditions in the inflation targeting era,” he said.
“Flaring volatility is a feature of a maturing tightening cycle as markets periodically reassess the peak of the cycle and the proximity of the easing cycle.”
Mr Uhlenbruch said market pricing of a 3.6 per cent peak in the cash rate is “too low”, adding expectations of easing in early 2024 are also premature.
“Recent data readings remain consistent with our central case view of a growth slowdown, rather than recession, and gradual fall in inflation,” he continued.
“Current market pricing is more consistent with a developing recession that crunches inflation and allows the RBA to ease sooner.”
