The Reserve Bank of Australia (RBA) is due to meet on Tuesday for the first time in the new financial year, and despite lower-than-expected May CPI data, economists are punting on another rate lift to 4.35 per cent.
Although the Australian Bureau of Statistics (ABS) reported a decrease in headline inflation from 6.8 percent in April to 5.6 percent in May, economists like AMP’s chief economist Shane Oliver argue that the July meeting remains “live”.
Dr Oliver stated: “We expect that the RBA will raise the cash rate again on Tuesday by another 0.25 per cent taking it to 4.35 per cent.”
He explained that while the lower-than-expected May CPI provides scope for another pause, the RBA is likely to be concerned about continuing underlying inflation readings of above 6 per cent, sticky services inflation, and the increasing risk of wages growth above levels consistent with the bank’s inflation target.
“We continue to think that the RBA has already done enough with inflation already falling and is not paying enough attention to the lags with which monetary policy impacts the economy,” Dr Oliver said.
While the decision remains uncertain, with roughly a 55 percent probability of a hike and a 45 percent probability of a hold, Dr Oliver believes that regardless of the outcome, the RBA will likely maintain its tightening bias.
“If not next week, then we would expect another 0.25 per cent hike in August followed by a final move in September, taking the cash rate to a peak of 4.6 per cent.”
Westpac backs hike rhetoric
Economist Bill Evans said in a note on Friday that tight labour markets, limited progress on reducing core inflation, and a pivot in the board’s reaction function, align with Westpac’s forecast for a rate increase in July, followed by another in August.
“We confirm our view that the board will decide to lift the cash rate by 0.25 per cent to 4.35 per cent at the July meeting with a further 0.25 per cent increase to follow in August,” Mr Evans said.
“With core inflation holding above 6 per cent; the unemployment rate holding nearly 1 ppt below the NAIRU (RBA’s estimate) and the cash rate only around 1 ppt into contractionary territory (we see neutral around 3 per cent) the cash rate will need to go higher.”
Unlike Dr Oliver, Mr Evans believes a pause, to allow the bank to gather further information, appears “unnecessary” and only risks the need for the cycle to extend even further into 2023.
In fact, Mr Evans believes the case for a further rate increase has strengthened since the last board meeting on 6 June.
He maintains a terminal cash rate of 4.6 per cent would be sufficient to meet the inflation objectives of the central bank but anticipates this will result in sluggish growth throughout the current and the following year.
“Westpac’s forecasts, which are based on a 4.6 per cent terminal rate, point to very weak growth in both 2023 (0.6 per cent) and 2024 (1.0 per cent) and an earlier achievement of the inflation target than currently forecast by the RBA.”
Possible pause, says HSBC
HSBC, however, offered a slightly different perspective.
Its chief economist, Paul Bloxham, believes the RBA will pause in July before hiking again in August.
He did, however, admit that signals from the RBA have been mixed and that, just like last month, a hike at the coming meeting cannot be ruled out.
“The RBA could consider that, with growth slowing, the jobs market lagging, inflation easing, and much of the effect of the tightening already delivered yet to feed through, it may not need to tighten further,” he said.
“On the other hand, with core inflation still high, the RBA could choose to hike, further reducing the risk of a persistent high inflation problem but increasing the risk of tipping the economy into a recession.”
Last month’s Australian GDP figures showed growth has slowed markedly, with GDP rising by only 0.2 per cent quarter on quarter, led by a weakening consumer spend.
As such, talk of a recession has intensified over the last few months with economists widely tipping that the chance of a recession now sits at 50-50.
AMP has already revised its Australian GDP growth forecast down to just 0.7 per cent for this financial year compared to the RBA’s forecast for growth of 1.4 per cent, with Dr Oliver recently warning that this recession would be very different from the slowdown experienced in 2020.
The government is, however, confident in the economy’s continued growth. Namely, last week, Treasurer Jim Chalmers said that while the economy will likely slow to 1.5 per cent next year, a recession is off the cards.
