This article is from the Australian Property Journal archive
AFTER the surprise upside in the latest Q1 CPI and labour data, economists are split on where the RBA will hike rates again at its upcoming May meeting.
ANZ is expecting the RBA Board to leave the cash rate unchanged at 4.35% during its meeting next week, while they do believe the minutes may show that the bank considered an increase.
“That said, we expect two material shifts from the RBA next week. The first will be in the rhetoric in the post-meeting statement and press conference. The second will be in the near-term inflation forecasts (although the rest of the RBA’s forecasts in the SoMP should be little changed),” said Adam Boyton, head of Australian economics at ANZ.
“On the rhetoric, we expect the post-meeting statement to read more hawkish than March. This will likely reflect tweaks to the inflation section, and a shift back to a more hawkish tone in the final paragraph.”
Due to the Q1 CPI outcome, ANZ expects the RBA to increase its near-term forecasts for headlined and trimmed mean inflation.
While slightly the lower starting point for unemployment indicates a near-term adjustment lower, with higher inflation and lower unemployment possibly resulting in a small upwards revision to the RBA’s near-term GDP growth forecasts.
“In the February SoMP the assumption was that the cash rate would be 3.9% in December 2024 and 3.4% by December 2025,” added Boyton.
“We expect the May SoMP assumption will be a broadly steady cash rate through 2024 before declining to 3.6% by the end 2025.”
On the other hand, Capital Economics is expecting a hike of 25bp at the meeting, referencing the RBA’s goals of returning inflation to target within a reasonable timeframe.
Capital Economics believes the RBA will reverse course after the recent data that suggests that the economy is stronger that previous thought.
“Our view is outside the consensus: the median analyst polled by Bloomberg expects the RBA to remain on hold,” said Abhijit Surya, Australia & New Zealand economist at capital economics.
“Meanwhile, financial markets are pricing in a meagre 3% chance of a 25bp hike next week. However, it’s worth noting that they now see about a one in four chance of a rate hike by year-end, whereas just a week ago they were all but certain that the Bank’s next move would be down.”
On top of the CPI upside and the trend unemployment rate has now stalling at 3.9% for five months straight, Capital Economics referenced the bank’s concerns around weak household consumption growth.
With retails sales having fallen by 0.4% month-on-month in most recent results, against previous expectations for a modest increase.
“Some commentators have gone as far as to predict that the RBA will have to hike rates thrice more in order to break the back of inflation,” added Surya.
“However, we think that’s a stretch too far. In our view, the string of upside surprises in the CPI and labour market data strengthen the case for the RBA to take out an insurance policy in the form a 25bp hike. But taking into account non-linearities in the disinflationary process, a more aggressive resumption of monetary tightening could prove to be overkill.”
Capital Economics still maintains that policy loosening is a distant prospect and has hence pushed back its forecast for the first rate cut from November 2024 to February 2025.
Citing Q4 CPI data expectations, which would see headline inflation at the top end of the RBA’s 2-3% target.
“We are forecasting a total of 100bp of cuts in the forthcoming cycle, which will take the terminal rate to 3.60% at end-2025,” concluded Surya.
“Crucially, however, our outlook is predicated on the unemployment rate rising sharply over the coming quarters. Should the labour market prove more resilient than we are anticipating, the Bank will have much less for room for manoeuvre.”
