The Reserve Bank is tipped to keep rates on hold for the second month in a row after inflation data last week came in below forecasts.
Most economists and financial markets are predicting the official cash rate will stay at 3.6 per cent when the RBA meets on Tuesday for its May meeting, although it will be a “close call”.
The Commonwealth Bank is maintaining its forecast for a 25 basis point increase, while NAB, Westpac and ANZ are all calling hold.
Australia’s inflation rate has fallen from a 30-year peak but, at 7 per cent for the March quarter, remains well above the RBA’s target of 2-3 per cent.
“Falling Australian inflation should enable the RBA to remain on hold in the week ahead, but it’s a close call,” AMP Capital chief economist Dr Shane Oliver said in a note on Saturday.
“Following significant falls in inflation in the US, Canada and New Zealand, Australian inflation is now also falling, adding to confidence we have seen the peak.”
Dr Oliver noted that the inflation reading was below the RBA forecasts.
“While another RBA hike on Tuesday can’t be ruled out given RBA concerns about wages growth and faster population growth adding to housing related inflation and rising wealth, on balance we expect the RBA to leave rates on hold for May, with the faster than expected fall in inflation providing it with greater scope to continue the pause in order to better assess the impact of past rate hikes,” he said.
“Either way, from later this year or early next we anticipate rate cuts to deal with a slowing economy.”
Australia’s population growth has surged to 2 per cent, compared with an average of around 1.5 per cent pre-Covid, as the government opens the floodgates to record numbers of overseas migrants.
Minutes from the RBA’s April board meeting noted concerns that the 700,000 new arrivals over two years to 2024 “could put significant pressure on Australia’s existing capital stock, especially housing, which would in turn manifest in higher consumer prices”.
“[Board members] observed that there were already signs that the recent fall in housing prices might be smaller and more short-lived than expected,” the minutes said.
“Although higher immigration might reduce wage pressures in industries that had been experiencing significant labour shortages, members noted that the net effect of a sudden surge in population growth could be somewhat inflationary for a period.”
CoreLogic figures for April showed Australian house prices rose for the second consecutive month in April by 0.7 per cent across the capital cities, with Sydney prices increasing 1.3 per cent.
PropTrack’s Home Price Index also found national house prices are continuing to stabilise.
Commenting on the looming RBA decision, PropTrack Senior Economist Eleanor Creagh said there is “still a way to go in returning inflation to the target range”.
“But with the impact of higher interest rates yet to fully impact household cash flows, and set to do so in months ahead, we’re likely to continue seeing inflation move lower. This gives the RBA leeway for a continued period of patience in May,” she said.
Tuesday’s meeting comes after a major review recommended stripping the central bank’s board of its power to set interest rates, paving the way for the biggest shake-up of the institution in a generation.
Instead, a panel of monetary policy experts that will meet eight times a year instead of 11 and conduct “more in-depth discussions including of the forecast, strategy and other monetary policy issues”.
Treasurer Jim Chalmers released the review of the RBA last month and said it would commit in-principle to its recommendations.
Price pressures easing
On Friday, a survey of 42 experts and economists by comparison website Finder had a slim majority of 23 forecasting a cash rate increase on Tuesday.
Nineteen respondents said they believed the RBA would hold the cash rate for the second month in a row at 3.6 per cent.
Of the 23 respondents predicting a rate hike, 19 put it at 25 basis points while two suggested 15 basis points.
“Today’s March quarter CPI and monthly March CPI indicator provide further evidence that inflation, though still ‘unacceptably high’, is at least clearly now heading in the right direction (i.e. down),” economist Saul Eslake wrote in the survey.
“And with a good deal of the effects of the monetary policy tightening still to be felt, the RBA can again leave its policy settings unchanged at its May board meeting.”
Harry Murphy Cruise from Moody’s Analytics also predicted a hold.
“Price pressures are undoubtedly easing,” he wrote.
“And with the lagged impact of monetary policy, another pause to assess how the backlog of rate hikes is working is warranted. We expect the board to hold rates steady at its next meeting, keeping a rate hike in the back pocket for June if needed.
“In the meantime, board members will want to see heat come out of the red-hot labour market and retail sales moderate. If that doesn’t happen, you can bet your bottom dollar the board will reach into that back pocket. We put the odds of that happening at 65 per cent.”
But Sean Langcake from BIS Oxford Economics predicted an increase.
“The question now becomes how quickly the RBA wants inflation to return to target,” he wrote.
“They have been surprisingly dovish in some communications, but we still expect further tightening with an eye toward maintaining credibility and anchoring expectations.”
Dr Tomasz Wozniak from University of Melbourne agreed.
“The new reading of the CPI inflation reaching 7 per cent in the first quarter of 2023 aligns the quarterly forecasts with the monthly indicating the cash rate at 3.77 per cent within the next three to five months,” he wrote.
“The prediction bands around this value reach from 3.4 to 4.1 per cent. My interpretation is a likely raise by 15 [basis points] this or next month. Beyond this horizon, the forecasts diverge with the bond yield curve modelling indicating further increases and the system focusing on inflation, labour market and expectations showing cuts.”
frank.chung@news.com.au