The Reserve Bank of Australia (RBA) is once again widely expected to announce a 25 basis point (bp) interest rate hike at its next board meeting, taking the cash rate to 3.60 per cent.
This move, which would mark the tenth consecutive rate hike by the central bank since it began its tightening cycle last May, is anticipated despite weaker than forecast economic figures including GDP, wages, unemployment and monthly CPI over the past month.
“In a somewhat ironic twist of fate, the key domestic economic data that has printed since the RBA made a hawkish tilt at the February Board meeting has come in softer than market and RBA expectations,” said Commonwealth Bank head of Australian economics Gareth Aird.
“The recent data indicates that the RBA may now be tightening policy into an economy that is already showing sufficient signs of softening from an output, prices and employment perspective. That is our assessment. But the board won’t arrive at that conclusion yet.”
GSFM investment strategist Stephen Miller said that the data released over the past month has likely reinforced the RBA’s existing disposition towards a 25 bp hike over a 50 bp hike.
“Official measures of wage growth are probably too high for the RBA (but only modestly so). The monthly consumer price index (CPI) indicator decelerated (albeit that its limited coverage of services inflation makes it an imperfect guide to the quarterly CPI) and the unemployment rate moved up slightly from levels close to a 50 year low,” he said.
“However, unit labour costs are running at around 7 per cent on an annual basis and other high frequency price and labour cost measures from the NAB Monthly Business Survey continue to run at elevated levels.”
While these figures are not expected to sway the central bank away from delivering a 25 bp rate hike, Mr Aird noted that they could be a topic of discussion at the March board meeting.
“It will likely mean that the board debates the prospect and risk of the Australian economy slowing more quickly than they currently anticipate.”
“But we don’t expect the recent run of data to dissuade the RBA from hiking the cash rate by another 25 bp in March. We expect the tone of the governor’s statement accompanying the board’s decision in March to be very similar to that struck in the February Statement.”
However, one potential change flagged by Mr Aird is that Philip Lowe could move away from the forward guidance provided in his last post-meeting statement, in which he said: “the board expects further increases in interest rates will be needed over the months ahead”.
“In a literal sense, some modification is required if the RBA seeks to water down the emphasis on the plurals in last month’s updated forward guidance (both rates and months),” Mr Aird explained.
“Repeating the same line from the previous statement after increasing the cash rate by an expected 25 bp in March implies an additional two rate hikes is in the RBA’s central thinking (that would take the cash rate to 4.10 per cent following an expected 25bp rate hike in March).”
Even if the RBA board delivers another 25 bp hike, Mr Miller suggested that the policy rate would ultimately require a “4 handle”, particularly given the central bank’s earlier “underappreciation” regarding the magnitude and persistence of inflation.
“That is not a controversial call given markets have priced that eventuality,” he said.
“The pandemic saw monetary policy assume unprecedented levels of accommodation. Viewed through that lens, policy adjustments through 2022 may have represented a partial return to some version of normality and perhaps tighter conditions are yet required to meet the inflation challenge.”
Referring to the experience of the 1970s, Mr Miller cautioned that the most cost-effective approach to containing inflation while minimising the risk of disruption to activity and employment is to take decisive action at the outset.
He added that the longer central banks delay aggressive action against inflation, the narrower the path between containing inflation and recession becomes, and the RBA’s hesitancy through 2022, he noted, had needlessly reduced the available options.
“That means 2023 will be a year of slow growth – perhaps even a recession. That slowing growth was “baked in the cake” some time ago with the RBA’s tardiness in recognising the extent of the inflation challenge,” Mr Miller said.
Offering an alternative view, he noted if the path between inflation containment and recession had grown even more narrow through 2022, “a continued focus on inflation now might mean that the path is navigable and the extent of dislocation in growth and employment is minimised”.
Also looking ahead, CBA reiterated its central scenario includes a peak rate of 3.85 per cent, with fast receding inflation and rate cuts in late 2023.
Meanwhile, in an interview with ABC Radio on Friday, NAB CEO Ross McEwan said that “two, possibly three” rate hikes will likely be on the cards over the coming months.
“Households are starting to feel the pressure of not just interest rates going up but also power bills, grocery bills. Everything is moving up on them with inflation, and that’s why the Reserve Bank has to stem the inflation flow we have at the moment. And the tool they have is interest rate rises,” he said.
“We’re still seeing an economy that’s going forward, even if it’s a little bit slower. And inflation is still a problem. So I think we’re in for another at least two, possibly three interest rate rises over the next six months.”
