It’s Reserve Bank roulette time for another month with borrowers and pundits bracing for the potential of another rate rise surprise.
Since May last year, the central bank has lifted interest rates on the first Tuesday of each month, with only the January holiday break and a short-lived pause in April breaking the metronomic rise in mortgage pain.
Predictions are split over whether the RBA will make it a 12th hike in 13 months at this Tuesday’s meeting. About a third of economists polled by Bloomberg expect a 25 basis-point increase in the cash rate to 4.1% but those at the three of the big four banks predict no change. Investors assessed the odds of such a rise as about a one-in-three risk.
Gareth Aird, head of Australian economics at CBA and one of the minority of commentators to predict the RBA’s shock rate rise in May, said the prospect of another hike in June was “live” but at only a 30% chance.
Most recent economic data had been on the weak side, compared with expectations, such as flat retail sales in April and a collapse in building approvals to their lowest level in 11 years, he said.
While the RBA might place some weight on a jump in April’s headline consumer prices “due to its influence on inflation psychology”, the underlying data revealing an ongoing slowdown “was encouraging rather than cause for concern”, Aird said.
RBA governor Philip Lowe, whose terms expires in September, repeated his mantra to Senate estimates last week that the bank would “do whatever’s necessary” to curb inflation, including lifting rates again.
Lowe contradicted some economists by saying he didn’t think May’s federal budget had added to price pressures. “[It]’s actually reducing inflation in the next financial year,” he said in comments that were seized up by the Albanese government.
Ahead of today's decision on interest rates by the Reserve Bank, investors were viewing another hike to 4.1% as a 33% chance. They are assess there's a 70% chance of such a rise by July and are fully pricing one in for August. pic.twitter.com/MB2qbL82ym
— @phannam@mastodon.green (@p_hannam) June 5, 2023
NAB’s Alan Oster said Tuesday’s rate decision was “line ball”, with the RBA likely to hold fire until it can assess the March quarter national accounts due out Wednesday from the Australian Bureau of Statistics.
NAB expects they will show GDP rose 0.2% from the previous three months, or the slowest quarterly growth since the September quarter of 2021 when half the economy was hamstrung by Covid lockdowns.
“We continue to see the RBA lifting the cash rate to 4.1% by August, with the risk that the [RBA] goes further,” NAB said in a briefing note.
Warren Hogan, Judo Bank’s chief economist who also correctly called May’s rate rise, predicts the 4.1% rate level will be reached on Tuesday in a “very close call”. A further 25bp hike will follow in August.
“The reality is they have to slow the economy and it’s probably not slowing enough,” Hogan said.
While parts of the economy are struggling, others, such as services, are gaining momentum. Judo’s index of business activity rose in May for a second consecutive month.
“The pace of growth was solid despite easing from the start of the second quarter,” the bank said. “Amid robust activity growth, Australian service providers raised their staffing levels to cope with a heightened workload.”
Some of that uptick was also reflected in the latest job ads survey by ANZ. Although down 8% since September, the measure remains “very high” by historical levels.
In another sign of resilience in the economy despite the bevy of RBA rate rises, job ad numbers bucked a recent down trend to post a small rise in May, @ANZ_Research said. Although ads are down 8% since their September peak, they remain "very high". pic.twitter.com/U6iViUuBhg
— @phannam@mastodon.green (@p_hannam) June 5, 2023
Other data pointing upwards includes house prices in most major cities and clearance rates at auctions, which neared 79% last week, according to preliminary figures from CoreLogic. It was the highest initial clearance level since late October 2021.
Hogan said the RBA raised its rate by 300 basis points between May and December last year, or by an average of 37.5bp per month. The 75bp of hikes so far this year amounted to 15bp on average, or less than half that pace.
Australia’s official interest rate also remained below nations such as New Zealand, at 5.5%, the US at 4.75-5%, and both the Bank of England and Bank of Canada at 4.5%.
Until the RBA managed to get real interest rates to zero after excluding inflation “their job is not done”, Hogan said.
• Correction: an earlier version of this report said all of the big four banks predict no change in the cash rate today. ANZ updated their forecast on Friday to forecast a 25bp increase this month.
