While a 25 basis point (bp) hike is seen as the most likely outcome of the Reserve Bank’s February board meeting, the Commonwealth Bank has argued that there is a “non-trivial chance” that the central bank may elect to raise rates by 40 bp.
For this month, CBA has put the odds of a 25 bp rate hike at 65 per cent, a 40 bp hike at 25 per cent, while the likelihood of another outcome sits at 10 per cent.
The RBA previously said that it had considered a 50 bp increase, a 25 bp increase, and the possibility of keeping the rates unchanged at its final meeting of 2022. This marked the first time since the current tightening cycle began in May last year that a pause was said to have been under consideration.
“We expect the board will once again debate the three options they considered in December. And our base case is that they hike the cash rate by 25 bp,” explained CBA head of Australian economics Gareth Aird.
“But we think the case to raise the cash rate by 40 bp to a conventional metric of 3.50 per cent, coupled with a stated intention to hold the policy rate steady over the period ahead will be on the table.”
Under this potential scenario, Mr Aird said that keeping policy on hold would be conditional on economic developments evolving broadly in line with the RBA’s updated forecasts. These are set to be previewed in governor Philip Lowe’s post-meeting statement on Tuesday before the full details are released in the RBA’s next statement on monetary policy.
According to CBA, RBA is largely expected to keep its inflation forecasts unchanged, while its expectations for GDP are predicted to be downwardly revised.
Mr Aird noted that the RBA has not given consideration to a 40 bp hike since May last year, when it eventually pivoted to a 25 bp increase to the cash rate. Since then, he said, the central bank has demonstrated a preference for moving in increments of 25 bps or 50 bps.
“But this has been in the context of an unbroken series of rate hikes at each board meeting since the tightening cycle started,” Mr Aird added.
“If the RBA is willing to pause in their tightening cycle there is merit in restoring the cash rate to a conventional metric prior to doing so. The board is clearly cognisant that a 40 bp rate hike would take the cash rate target to a more orthodox number. There is no other reason to have picked 40 bp as an option for the May 2022 rate hike.”
However, if the RBA does lift the cash rate by 25 bps, aligning with CBA’s central scenario and the expectations of a majority of economists, Mr Aird said that a stated intention to pause would be unlikely.
“Rather they are likely to reiterate that they are not on a pre-set path whilst retaining a hiking bias. But this does not preclude a pause at the March board meeting,” he added.
