Economists tip rate rise in June as RBA minutes reveal wage concerns

Market economists have strengthened their expectations the Reserve Bank will hike its cash rate in June, although a May rise remains open.

‘We believe that inflation will eventually come back to earth as GDP growth slows below potential, supply shortages diminish and energy prices drop back,’ says Capital Economics. Above, shoppers including Lucy Farran at Adelaide’s Central Market. Picture: Dean Martin

Market economists have strengthened their expectations the Reserve Bank will hike its cash rate in June, following the release of board minutes that conceded higher inflation and wages have brought forward the likely timing for a cut.

ANZ head of Australian economics David Plank said the case for a rate hike in June rather than May was reinforced by minutes of the bank’s April 5 board meeting.

“In terms of June versus May for the first change in the cash rate, the most important new information in the minutes is that the RBA is expecting core inflation to be above 3 per cent year-on-year in the March quarter,” he said.

While the minutes were a final chance to leave the door ajar for a hike in May, according to Commonwealth Bank’s head of Australian Economics Gareth Aird, they indicated the RBA would prefer to see new data on labour costs and national accounts before hiking rates in June.

The minutes noted inflation and wage developments have “brought forward the likely timing of the first increase in interest rates” and that the board will “assess incoming information as it sets policy to support full employment in Australia and inflation outcomes consistent with the ­target”.

However, no official figures on wages or inflation have been released in the past month.

Since the RBA’s April 5 meeting both the Reserve Bank of New Zealand and the Bank of Canada have hiked their benchmark rate by 50 basis points, with the US Federal Reserve expected to deliver a hike in May.

The actions of other central banks mattered for RBA policy deliberations, RBC chief economist Su-Lin Ong said, reiterating her forecast of a 15 basis point hike in June. “The RBA also looks ­increasingly like an outlier with cash still sitting at an emergency 10 basis points.”

Meanwhile, Capital Economics expects the RBA will hike rates to 2.5 per cent by mid-next year before a housing downturn forces it to “reverse course”.

“Most analysts are overestimating the near-term negative impact of RBA rate hikes on household finances and are therefore underestimating the degree of tightening required to bring inflation under control,” Capital Economics economist Marcel Thieliant said in a note to clients.

“For one thing, households’ buffers will be exhausted eventually, particularly if a combination of soaring inflation and sluggish income growth undermines real income growth.

“And higher interest rates are very likely to result in a housing downturn before long.

“Indeed, we now expect house prices to fall by 10 per cent from early next year,” he said.

Capital Economics highlighted the RBA has responded to every housing downturn over the last four decades – except the very mild one in 2004 – by cutting interest rates.

“With wage growth still far lower than it was before the GFC, we believe that inflation will eventually come back to earth as GDP growth slows below potential, supply shortages diminish and energy prices drop back.

“As such, we don’t believe that the next housing downturn will be an exception and have pencilled in 50 basis points of rate cuts in 2024.”

Originally published as Economists tip rate rise in June as RBA minutes reveal wage concerns