The Reserve Bank (RBA) surprised markets in May by lifting its cash rate by 25 basis points (bp) after a brief pause in April, and while many had hoped that the bank had reached its terminal rate, economists now fear that another rate boost could be on the cards especially given still too high inflation.
Namely, according to the Australian Bureau of Statistics (ABS), annualised inflation accelerated in April by 0.5 percentage points to 6.8 per cent.
The rise exceeded market expectations of a mild 0.1 percentage point increase to 6.4 per cent and represented the first monthly increase to annualised inflation over the 2023 calendar year.
On Friday morning, ANZ bumped its terminal cash rate up to 4.35 per cent, noting that “we no longer see 4.1 per cent as sufficient to bring inflation back to the target in a reasonable time”.
“We see as August most likely for a move.”
Also on Friday, the Fair Work Commission announced its decision to lift the minimum wage to 5.75 per cent, which prompted further revisions in rate expectations among economists.
Namely, speaking to InvestorDaily, AMP’s Shane Oliver said that the wealth manager now expects a 25 basis point hike on Tuesday, despite just days earlier predicting a hold.
“The RBA is already concerned that inflation is too high and productivity too low, the April rebound in inflation and the 5.75 per cent increase in award wages and 8.65 per cent increase in the minimum wage will add to it,” Dr Oliver said.
“Particularly as the 8.6 per cent minimum wage increase is getting lots of headlines and will influence wider wage growth expectations. So we now expect another hike.”
Dr Oliver also cautioned that a June hike increases the risk of the RBA going “too far” and “knocking us into recession”.
Last month, following the RBA’s unexpected rate boost, Dr Oliver said he was concerned the RBA had already “gone too far” and was “unnecessarily going to plunge [Australia] into a recession”.
“I mean, yes, inflation is too high, and there are upside risks to wages growth,” he told InvestorDaily at the time.
“But by the same token, there’s a big tightening in the pipeline yet to fully feed through to the economy, and that’s going to cause a lot of pain through this year, particularly for households with a mortgage.
“So, I don’t think they’re allowing enough time to let lags or the lagged impact of past hikes show up.”
Also commenting on the RBA’s impending decision, Paul Bloxham, chief economist at HSBC, said on Friday “it’s a close call”.
Describing the upcoming meeting as “finely balanced”, Mr Bloxham said the board is likely to consider whether it should hold steady or raise its cash rate by a further 25bp.
“The arguments for holding steady include that: the recent falls in retail sales and building approvals suggest weakening growth; the April jobs numbers suggested the labour market is loosening; the Q1 wages figures showed no signs of a prices-wages spiral; much of the effect of the tightening already delivered (including the hike in May) is yet to feed through to the economy; and, having hiked in early May, the board may deem that a bit more information may be needed before it would move again,” the economist explained.
“A hike in June could be motivated by the indications that, although inflation has peaked, it is still too high and is set to take some time to fall back to the RBA’s 2-3 per cent target. The monthly CPI indicator for April rose strongly after three months of weaker prints. This index is new, experimental and volatile, but gives an indication that the high inflation challenge remains.”
While reaffirming HSBC’s central case for a hold in June, Mr Bloxham admitted that a hike cannot be ruled out.
“If a hike is delivered, the risk of a recession rises and staying in the ‘narrow pathway’ may become more difficult.”
Commenting last week on the unexpected CPI boost, ANZ chief economist Adelaide Timbrell admitted at the time the group’s projections of one last 25 bps increase to the cash rate in August had been undermined.
“The risk around our forecast of a 4.1 per cent cash rate in August has been tilted toward earlier and/or more action from the RBA,” she said.
“Today’s CPI data add to that risk, with inflation, construction work done and credit all consistent with higher interest rates soon.”
But Commonwealth Bank economist Stephen Wu said while the April result was an “upside surprise”, further tightening was unlikely given annualised inflation is well past its peak of 8.4 per cent in December 2022.
“The bottom line is still that the annual rate of inflation continued to decelerate and is lower than where it was in the December quarter last year and the March quarter this year,” he said.
CBA called an end to the tightening cycle following the RBA May decision, which took the cash rate to 3.85 per cent and represented the 11th hike in 12 months.
The money market now has priced a 42 per cent chance of a 25 basis point rate hike on Tuesday and an 80 per cent chance by July.
