RBA rates decision to shape equities, bonds, property and most other asset classes

The guessing game – and direction investors can turn – will be answered on Tuesday when Philip Lowe reveals the RBA’s decision on the cash rate.

RBA governor Philip Lowe will address the National Press Club on Wednesday. Picture: Brendon Thorne

All eyes turn to the Reserve Bank on Tuesday as investors wonder “will it, or won’t it” lift interest rates for the 11th time since May 2022.

It will set the tone for the stockmarket this week and dominate the investment outlook for equities, bonds, property and most other asset classes.

Recent inflation and retail data has given the central bank the option to leave rates on hold for April to get a better handle on the impact the string of interest rate increases to date has had on the economy and prices.

At least equities investors are expected to start the week strong and bullish because Wall Street’s S&P 500 index closed Friday night up 1.44 per cent on softer inflation data, which lifted hopes the Federal Reserve could begin easing its interest rate tightening policy.

KPMG chief economist Brendan Rynne believes there will be one more rate rise on Tuesday, while economists for the big four banks are evenly split between those who expect another rise and those who do not.

“It is a tough call but on balance I believe the weight of factors will push the RBA towards keeping the hikes going for one more month,” Dr Rynne said.

KPMG chief economist Brendan Rynne.

“There are several factors that could cause the RBA to pause in April.

“The monthly CPI fell from 7.4 per cent year on year in January to 6.8 per cent in February, and core inflation also declined from 7.5 to 6.9 per cent.

“The recent turbulence in the global banking system has raised concerns over the impact of rapidly tightening monetary policy on financial stability.

“Many have expressed worries about a mortgage cliff caused by the monetary tightening, in which those still on fixed rates will be hit hard at the end of their fixed terms.”

However, all the four important data pieces the RBA watches closely point to a resilient economy, supported by a tight labour market – and these provide a strong case for another 25 basis point increase, he said.

“Given inflation is still in the uncomfortably high territory, and economic conditions have remained robust amid a tight labour market, KPMG believes the RBA will follow their international counterparts and opt for another 25 basis point increase on Tuesday,” Dr Rynne said.

“We expect the cash rate to peak at 3.85 per cent, meaning a pause after April to give the RBA time to assess developments in the Australian economy after an 11th consecutive rate rise.”

Westpac, however, believes the RBA will leave rates on hold in April.

Westpac chief economist Bill Evans. Picture: John Feder

“While markets have stabilised, the clear risk of credit tightening in the US and Europe … lowers the outlook for global growth,” Westpac chief economist Bill Evans said.

“Given these issues, the appropriate policy for the board is to pause to await clearer information.

“When central banks are faced with high inflation, the priority must be to move policy into contractionary territory.

“The board acknowledges that policy is now contractionary so the urgency to move policy at every meeting passes. The RBA board can now take that break.”

Westpac believes a decision to hold rates in April is unlikely to mean the end of the tightening cycle and it expects a final 25 basis point increase at the May board meeting.

Investors will get a better feel for the RBA’s outlook for the economy on Wednesday when governor Philip Lowe addresses the National Press Club.

Key economic indicators due out this week include on Monday’s CoreLogic home values as well as February dwelling approvals, housing finance and investor finance data. On Friday in the US there will be the release of key non-farm payrolls and employment statistics.