Economists predict ‘lineball call’ for interest rate hike after RBA April meeting

Members of the RBA board will meet tomorrow to make what could be a landmark call on the nation’s cost of living crisis.

Tuesday’s meeting of the Reserve Bank board will be another closely-watched affair, with Australians wondering if another interest rate hike is on the cards, which would add even more stress to household budgets.

But unlike the 10 previous consecutive rate rises, made definitively as the RBA board struggles to combat inflation, their April meeting could go either way, thanks to important data released since their March decision.

RBA governor Philip Lowe previously indicated he would be looking at three sets of data in particular: jobs, retail trade, and the Consumer Price Index (CPI) — the key indicator of inflation.

“With monetary policy now in restrictive territory, we are closer to the point where it will be appropriate to pause interest rate increases to allow more time to assess the state of the economy,” he said in a speech following the March rates decision.

Reserve Bank of Australia Governor Philip Lowe could go either way in Tuesday’s board meeting, increasing rates, or putting them on hold. Picture: NCA NewsWire / Nikki Short

The Australian Bureau of Statistics (ABS) Labour Force report for February, released March 16, showed a drop in unemployment to 3.5 per cent, seasonally adjusted, with an increase of about 65,000 jobs and 19,800 people finding work.

While Tuesday’s retail trade report showed spending was flat in February — up 0.2 per cent month-on-month, but that was 6.4 per cent better than the February 2022 result.

And Wednesday’s monthly CPI indicator put inflation at 6.8 per cent for the 12 months to February — a drop from 7.4 per cent in January, suggesting the RBA’s aggressive rate rise regime may be working as intended.

But experts are split on whether the RBA board will put the official cash rate up for an 11th consecutive month, or break their streak and keep the rate on hold at 3.60 per cent.

Research director with comparison website RateCity.com.au Sally Tindall said this coming Tuesday will be a “lineball call for the RBA.”

“The arguments for and against a hike are both strong,” said Ms Tindall, “however, if the RBA is ultimately looking to hit the pause button, this latest round of inflation data will give them cover to take a breather.

“Household budgets that are already at the end of their tether might still tip into the red in the next couple of months even if the cash rate stays put in April.

A rate rise on Tuesday would be the 11th consecutive increase, aimed at reining in inflation. Picture: NCA NewsWire / Jeremy Piper

“If the RBA keeps the cash rate on hold, borrowers should not assume that’s the end of the hikes. Inflation might be moving in the right direction but it’s unlikely to come all the way back down below three per cent without further intervention.

“If you’ve got a mortgage, plan for at least one, potentially even two more RBA hikes in the next few months.

“If you budget for these hikes and they don’t materialise then you may decide to tip it into your mortgage anyway,” she said.

AMP’s chief economist Shane Oliver also suggests a hold on rates next month is likely.

“The bigger than expected fall in the February CPI Indicator provides more evidence inflation has peaked and is now slowing,” wrote Mr Oliver on Twitter on Thursday, following the release of the CPI data.

“Along with falling real retail sales, mixed (business) conditions, signs of a slowing jobs (market) and global banking turmoil it supports the case for the RBA to pause next (week).”

The bigger than expected fall in the Feb CPI Indicator provides more evidence inflation has peaked & is now slowing. Along with falling real retail sales,mixed biz conditions, signs of a slowing jobs mkt & global banking turmoil it supports the case for the #RBA to pause next wk pic.twitter.com/XVbbejTJi8

— Shane Oliver (@ShaneOliverAMP) March 29, 2023

Head of Australian Economics with Commonwealth Bank’s research division, Gareth Aird, believes the RBA will keep the rate on hold, but it will be “a very close call.”

“Reading between the lines, it is clear that the RBA would like to pause the tightening cycle,” said Mr Aird, “but the Board wants to see sufficient evidence in the domestic economic data that demand is cooling.

“But the domestic data that the RBA said they were monitoring over the past month has not made the case to pause in April an obvious choice.

Retail figures for February were flat, however, they came off the back of an increase in January. Picture: NewsWire / Sarah Marshall

“A pause in the tightening cycle in April does not necessarily mark the end of the tightening cycle. The RBA Board can pause in April while retaining full optionality to raise the cash rate in May if the data comes in a little hotter than anticipated over the next month,” said Mr Aird.

CBA’s prediction is a 55 per cent chance the cash rate will be put on hold in April, with a 45 per cent chance the rate will be put up a further 25 basis points to 3.85 per cent.

RBA Governor Philip Lowe is due to deliver a speech to the National Press Club on Wednesday, a day after the RBA board’s April meeting.

Originally published as Economists predict ‘lineball call’ for interest rate hike after RBA April meeting