The Commonwealth Bank of Australia (CBA) has revised its cash rate outlook, forecasting a pause to the Reserve Bank of Australia’s (RBA) monetary policy tightening cycle, which has involved 10 consecutive monthly hikes since May 2022.
CBA had predicted a 25 bps increase, which would have taken the cash rate to 3.85 per cent — the bank’s projected terminal rate.
“In what we believe is a very close call, we now expect the RBA to leave the cash rate on hold at 3.6 per cent at the April board meeting,” CBA noted in its latest market update.
“We ascribe a 55 per cent chance to no change and a 45 per cent probability to a 25 bp rate increase to 3.85 per cent — we consider the risk of any other move immaterial.”
The revision follows a recent run of economic data, which suggests the economy is escaping the throngs of inflation.
CBA acknowledged several of the RBA’s central bank peers have lifted rates in recent weeks despite volatility in global financial markets, but said the domestic economy is now “showing sufficient signs of slowing”.
“Monetary policy works with a lag and only ~45 per cent of the increase in the cash rate to date had passed through to scheduled mortgage repayments at the end of 2022,” CBA observed.
However, CBA said the Reserve Bank may consider an additional hike in May if inflation proves more stubborn than the latest data indicates.
According to the Australian Bureau of Statistics’ (ABS) latest monthly consumer price index (CPI), annualised inflation fell for the second consecutive month to 6.8 per cent in February — below market expectations.
This represented a 0.6 per cent decline from the previous month, in which annualised inflation was reported at 7.4 per cent.
The monthly decline was 1.6 per cent below the peak of 8.4 per cent in December.
The CPI result is expected to influence the Reserve Bank of Australia’s (RBA) next monetary policy board decision, along with the latest retail sales figures and business indicators.
The ABS released retail sales figures for the month of February earlier this week, revealing a 0.2 per cent increase, down from a 1.8 per cent rise in January.
Except for the latest labour force data — reporting a seasonally adjusted unemployment rate of 3.5 per cent, down from 3.7 per cent in January — other periodic economic indicators suggest the economy is weakening.
Wages grew 0.8 per cent in the three months to 31 December, slowing from 1.1 per cent in the previous quarter and falling below market expectations of a 1 per cent rise.
This coincided with weakness in aggregate economic activity, with GDP growth slowing to 0.5 per cent over the fourth quarter of 2022 — below market expectations of 0.8 per cent.
CBA joins Westpac, AMP, HSBC, and ING in projecting a cash rate hold at the RBA’s next monetary policy board meeting on Tuesday, 4 April.
ANZ, however, remains hawkish and continues to forecast two additional 25 bps hikes, which would take the cash rate to a peak of 4.1 per cent.
The ASX’s RBA Tracker is signalling a 98 per cent likelihood of a pause to the tightening cycle.
