The Reserve Bank of Australia (RBA) is expected to keep interest rates on hold again in May, according to the latest forecasts from a range of leading Australian economists.
Westpac, ANZ, and HSBC are among those who have pencilled in a pause for the RBA’s May board meeting, which would see the cash rate held at 3.60 per cent.
This comes as the consumer price index (CPI) for the March quarter indicated a slight improvement towards the RBA’s target range of 2–3 per cent.
Speaking ahead of the RBA’s next board meeting, Westpac chief economist Bill Evans said that the bank had long predicted that May would be the peak of the current tightening cycle.
However, he conceded that Westpac had earlier expected the peak to reach 3.85 per cent but noted that the bank had revised its forecast following the March quarter inflation report.
“The inflation report is in line with the board’s path to achieving its stated objective of having inflation back at the top of the 2–3 per cent target by mid-2025. This provides the board with further scope to extend the pause we saw in April,” Mr Evans said.
“The board will still retain its tightening bias but given that the next ‘live’ meeting is likely to be in August (following the release of the June quarter inflation report) and that the need for further tightening will have eased further by then, the cash rate appears to have peaked at 3.6 per cent.”
Assessing the latest data, economists at ANZ said that the moderation in inflation could suggest another pause in May, but the bank failed to dismiss the possibility of further tightening in the future.
“With the board having taken the decision to pause in April and the Q1 CPI data either consistent or lower than the bank’s expectations, we expect another pause in May,” ANZ’s economists said.
“That does not mean that the cycle is over, however. Not only will the decision in front of the board be close, but the likely persistence of services inflation suggests another interest rate increase will ultimately be necessary.”
Prior to the latest CPI release, ANZ had predicted that the RBA would keep interest rates on hold until August, when it was expected to deliver one more hike of 25 bps.
‘Inflation has passed its peak’
According to HSBC chief economist Paul Bloxham, the Q1 CPI figure provided “clear confirmation” that inflation had peaked. Additionally, he suggested that the March labour market data had proven that unemployment is past its trough.
The firm maintained its central case that the RBA would keep the cash rate on hold at 3.60 per cent throughout the rest of 2023 and 2024, in what it described as a “long pause”.
“We continue to see the RBA as putting a higher priority on delivering a soft economic landing, thereby prioritising job retention in exchange for a slower fall in inflation back to target,” said Mr Bloxham.
“In part, this is feasible because the pick-up in wages growth has, so far, not been to an excessive rate. In addition, the RBA is well aware that there are lags in the transmission of monetary policy, and having tightened very quickly and substantially, they want more time to assess the full impact on the economy.”
CBA contradicts expectations
Contrasting these expectations, economists at the Commonwealth Bank have retained their forecast that the central bank would increase the cash rate by 25 bps in May.
CBA head of Australian economics Gareth Aird said that while the arguments in favour of leaving the cash rate on hold were “sound”, they would be weighed up against the case to lift again.
According to him, the RBA’s updated economic forecast, anticipated by CBA to affirm the RBA’s expectation for inflation to return to the target range in 2025, will be a crucial factor in the upcoming rate decision.
“No change to the RBA’s inflation profile would bolster the case to raise the cash rate in the board’s eyes [on Tuesday] given their objectives,” said Mr Aird.
“Plan A for the board from here is to bring the rate of inflation down over time while ‘keeping the economy on an even keel’. This essentially means trying to keep the unemployment rate low while the rate of inflation subsides.
“Governor Lowe wants to keep as many job gains as possible as inflation is brought back to target over time. Essentially, the RBA is trying to preserve both the gains in employment and the value of money simultaneously. This is not an easy task. But we believe it is the right objective.”
Before deciding to pause in April, the RBA had delivered 10 consecutives interest rate hikes, with a combined 350 bps of tightening since May last year.
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.