Reserve Bank set to deliver a tenth rate hike

The RBA is widely expected to announce another 25 basis point interest rate hike on Tuesday, but there’s some uncertainty about its guidance on the monetary policy outlook.

Australia’s Reserve Bank is widely expected to announce another 25 basis point interest rate hike on Tuesday, but there’s some uncertainty about its guidance on the monetary policy outlook.

The expected increase in the cash rate to a decade-high of 3.6 per cent will be the tenth consecutive hike since the central bank started lifting rates from a record low of 0.1 per cent last May.

It will add about $95 to the monthly payment on a $600,000 mortgage, bringing the total increase in mortgage payments to about $1200 a month or nearly $14,500 a year.

In the past month the unemployment rate hit a nine-month high, consumer confidence dived to recessionary levels, wage growth was less than expected, quarterly economic growth was disappointing, monthly CPI rose less than expected and building approvals and housing finance data stayed weak. But business confidence and conditions rebounded strongly and major central banks including the Federal Reserve and the European Central Bank became more hawkish amid surprisingly positive data.

After being surprised by core inflation data for the December quarter, the RBA may be reluctant to soften its hawkish guidance until it has confirmed that inflation is falling more rapidly than ­expected.

If the cash rate peaked at 3.75 per cent in the second half of 2023 – as per the “path” derived from surveys of economists and financial market pricing – inflation would only be at the top of its 2-3 per cent target band by the end of its forecast period in mid-2025, RBA forecasts showed last month.

Economists are now mostly split between those expecting a 3.85 per cent peak cash rate and those expecting 4.1 per cent. Market pricing has moved up to imply a peak around 4.2 per cent.

March quarter CPI data on April 26th and the wage price index on May 17 are likely to be crucial inputs into the RBA’s thinking on whether it needs to keep lifting rates.

In February, RBA governor Philip Lowe said: “The board expects that further increases in interest rates will be needed over the months ahead.” In December, he said: “The board expects to increase interest rates further over the period ahead, but is not on a pre-set course.”

Westpac chief economist Bill Evans said the phrase “not on a pre-set course” had allowed for the possibility of an imminent pause by the RBA, as well as the possibility of resuming hikes later. “By choosing to leave that term out of the guidance, a reasonable assumption was that the board had decided to continue the steady 25 basis points per meeting before deciding on a permanent pause,” he said.

Minutes from the February meeting confirmed that a change of approach had been adopted by noting that a pause had not even been considered at the meeting.

“For these reasons, we would be very surprised if the board decided to pause in March,” Evans said.

The issue will be whether the RBA allows for a possible pause in April, or reaffirms its February guidance. A further hike in April “seems the logical extension of the February statement”, but there had been “downside surprises” in wage inflation and economic growth data, he added.

But while wage measures in the national accounts confirmed the slowdown in the WPI, a sharp fall in productivity boosted unit labour costs 7 per cent on-year – highlighting the risk from wage growth. Inflation indicators in the national accounts were strong, and Westpac’s forecast for the US federal funds rate has risen 50 basis points to 5.25-5.5 per cent.

“Having signalled multiple rate hikes at the February board meeting, it seems that the prudent approach for the board at the March meeting will be to remain consistent with that guidance while certainly not committing to a move in May,” Mr Evans said.

BofA’s economists said the moderation in recent growth, wages and monthly inflation data will be of some relief to the RBA after it warned last month that a “price-wage spiral” could cause long-term inflation expectations to move higher, making it harder to bring inflation down back to target, but they still see the cash rate hitting 4.1 per cent by May.

NAB economist Taylor Nugent said the RBA wouldn’t want to “pre-commit as heavily” after the run of softer data since its February meeting. The RBA should tweak its language “more akin to November and December, when the board expected to increase interest rates further over the period ahead’’, he said.

Originally published as Reserve Bank set to deliver a tenth rate hike