Will the RBA Keep Its Key Interest Rate or Raise It Again as Inflation Stirs?

Moomoo News AU wrote a column · May 6, 2024 16:52

The Reserve Bank of Australia (RBA) board will hand down an interest rate decision on Tuesday amid speculation 2024 could bring as many as three cash rate hikes. All but one of the economists surveyed by Bloomberg expect the Reserve Bank will hold the cash rate at 4.35% for a fourth straight meeting, while reinstating a hawkish bias to acknowledge sticky consumer prices.

Stubborn Inflation Is Largely to Blame

• Housing Rent Hits Record High

Rental prices in Australia continue to surge, setting a new record in April, as certain urban areas experience a resurgence in growth rates. This trend poses a concern for the Reserve Bank, which is expected to maintain borrowing costs at their highest level in 12 years during this week's deliberations to mitigate escalating price pressures. According to CoreLogic, a property consultancy firm, the national median rent reached A$627 per week as of April, marking an 8.5% increase from the previous year. Sydney remains the priciest rental market, with a weekly median rent of A$770.

Source: CoreLogic Inc.

Part of the reason for the re-acceleration in rents nationally could be due to renters being forced into more affordable, peripheral housing markets as they become priced out of more desirable and central metropolitan locations," said Eliza Owen, an economist at CoreLogic.

A government report released on Friday highlighted critical issues in the Australian housing market: housing prices and rents are rising faster than wages, rental vacancies are at near-record lows, there's a backlog of 169,000 households on public housing waiting lists, 122,000 individuals are homeless, and the forecast for new housing supply is grim. The report concluded that the housing market in Australia is unhealthy, characterized by sporadic surges in prices, insufficient supply for demand, an overreliance on the private market for housing needs, scarcity of options, and a lack of diverse housing choices to meet the varied demands.

• A Stronger Than Expected Reading for the March Quarter

Recent optimism about inflation trending downwards in Australia has been unsettled by a higher-than-anticipated inflation rate for the March quarter. This has led to speculation about whether the Reserve Bank of Australia (RBA) will cut or raise the cash rate. As the RBA prepares for its meeting on May 6-7, with updated economic forecasts expected, the current cash rate stands at 4.35%. The consensus among investors is that an increase in the cash rate is unlikely this month; if it were to happen, it would be the 14th hike in two years and the first since November.

Will the RBA Keep Its Key Interest Rate or Raise It Again as Inflation Stirs?

The possibility of a rate cut seemed plausible until the March Consumer Price Index (CPI) figures were released, prompting a shift in expectations towards a potential rate increase by the end of 2024. Most analysts do not anticipate an immediate rate hike, with Capital Economics being a notable exception, suggesting a rise in May is more probable than not.

The major banks are predicting that the RBA's next move will be to lower the rate, projecting a cut by Christmas. Some inflationary pressures in March, such as annual increases in education and pharmaceutical costs, are not expected to recur in June. While recent fuel price hikes could exert upward pressure, the underlying core inflation is not likely to change significantly in the near term.

The economics teams at Australia's 'Big Four' banks all expect the Reserve Bank to cut interest rates in November, rather than September. They say last week's surprisingly strong inflation data show inflation is 'stickier' than anticipated. But extremely weak retail sales in March show households are under pressure, while strong population growth is complicating the RBA's fight against inflation.

Analysts' Take

• "The RBA will remain data dependent and will want to keep all options on the table," said Andrew Boak, chief Australia economist at $Goldman Sachs (GS.US)$. "The risk of a restart in the tightening cycle has increased but our base case remains for the RBA to start easing in November 2024."

• The biggest of the big four previously expected to see three cash rate cuts, worth a combined 75 basis points, this year.

The near‑term risk sits with an interest rate hike," $CommBank (CBA.AU)$ head of Australian economics Gareth Aird said this week.

But we expect the RBA to be on hold over the next six months given the economy is still contracting on a per capita basis, inflation is forecast to fall further, and the labour market is anticipated to loosen."

• After last week's higher-than-expected inflation figure, Judo Bank chief economic adviser Warren Hogan warned the RBA would have to raise rates three times this year, to 5.1 per cent, to ensure inflation didn't get out of control.

• Sean Langcake, head of macroeconomic forecasting for Oxford Economics Australia, said last week's surprise inflation data had sparked concerns that the RBA would have to raise rates again to rein in inflation, but consumer demand was clearly "very restrained" at the moment.

The underlying trend in retail spending remains very weak, with spending up just 0.8 per cent on a year earlier. Considering the brisk pace of population growth, this is a very soft trend," he said.

• Economists say the RBA will need to be mindful of the actions of Treasurer Jim Chalmers who unveils the budget next week.

It's crucial that the federal budget remains neutral at best to complement the RBA's efforts; a stimulatory budget risks undoing the progress made so far in tackling inflation," said Devika Shivadekar, an economist at consultancy RSM Australia.

$S&P/ASX 200 (.XJO.AU)$ $S&P 500 Index (.SPX.US)$

Source: Bloomberg, ABC News, The Guardian, Savings

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