RBA makes post-budget cash rate call
In the April interest rate decision from the Reserve Bank of Australia (RBA), the board decided to hold the official cash rate at a record low 0.1 per cent – a rate that has remained unchanged since November 2020.
The bank’s latest call was largely anticipated despite three consecutive quarters of inflation being on or above the top range of the official target band.
“Today’s interest rate decision comes as no surprise,” said Anneke Thompson, chief economist at CreditorWatch.
“It does, however, seem that inflation is here to stay, at least for the short term, and therefore a rise in the cash rate is imminent.”
Last week, the federal government brought down its pre-election budget, reinforcing sizable improvements in the economy and the labour market.
But the budget’s potential impacts on inflation are still being debated.
“Cash splashes in the form of petrol savings and extra tax cuts for low and middle-income workers will work to move money through the economy, at least temporarily.
“However, it remains to be seen if households will spend this money or will squirrel it away as a cushion against future higher home loan rates,” Ms Thompson said.
But on the upside, it’s the employment growth that has been declared a shining light for the economy. According to Ms Thompson, its strength is fuelling wage growth forecasts and setting the scene for an imminent interest rate rise.
“Having just reached full, or close to full employment, it’s highly unlikely the RBA will choose to threaten this status by raising the cash rate too quickly. A steady approach is a more likely scenario, with small rises spaced out as the RBA monitors the impact of each rate rise as they occur.”
AMP’s Shane Oliver is confident that the conditions for a rate hike will be in place by June. He, too, is impressed by sturdy employment figures.
“The RBA’s objective of full employment has been reached, wages growth is picking up and inflation is pushing well above target with a rising risk that inflation expectations will start to rise in which case it will become self-feeding, and the Budget will add in more stimulus this year,” Dr Oliver said.
Economists do expect the RBA to rethink its patient approach once March quarter CPI figures are released on 27 April.
According to GSFM investment strategist Stephen Miller, if some of the early indications of March quarter price pressures show up in the CPI release in April, the RBA could be forced to lift rates as early as May.
NAB recently forecasted core trimmed mean inflation at a whopping 1.2 per cent for the March quarter and 3.4 per cent over the year. According to Mr Miller, if realised, the six-month annualised rate of core inflation would be 4.4 per cent.
This, he noted, is even before the full extent of the price pressures unleashed by the Ukraine conflict have been reflected.
An outcome close to NAB’s prediction would again blow out of the water the RBA’s forecasts made in February.
“The RBA must by now be keenly aware of this,” Mr Miller said.
Scott Solomon, associate portfolio manager of T. Rowe Price’s dynamic global bond strategy agrees the RBA could open the door ever so slightly to a May hike just in case Q1 CPI is a blowout.
“Given what has occurred in other developed markets they may be inclined to remind the market they are nimble and have the appropriate tools in their kit. Because they consider this a tail event, I don’t expect this to be addressed in the official release, but more likely via speeches post release,” Mr Solomon said on Tuesday.
“There is always that possibility the RBA will change directions without warning – look no further than the RBA’s handling of the end of Yield Curve Control (YCC) in October – but for now I think the RBA should remain on the path they’ve laid out thus far in 2022.”
