The Reserve Bank of Australia faces its most challenging interest rate decision on Tuesday since it began raising borrowing costs last May, with economists divided on whether a record 11th consecutive hike or a pause will result.
The RBA’s board will release its verdict at 2.30pm AEST. The ANZ and NAB predict the central bank will raise its cash rate a further 25 basis points to 3.85%, as do nine other economists surveyed by Bloomberg News.
By contrast, 16 economists, including those at CBA and Westpac, predict the RBA will pause, leaving the rate at 3.6%. Since May, the bank has lifted the rate by 350 basis points – the fastest increase since the early 1990s.
Another 25 basis point rise would lift monthly repayments on a typical $500,000 mortgage by about $78. All up, the monthly increases over the past 11 months would exceed $1,000 for such borrowers, according to RateCity.
The RBA governor, Philip Lowe, last month flagged the possibility of a rates pause, depending on how the data played out. The figures since have been mixed, with surprisingly strong labour market figures for February and then weaker-than-expected inflation numbers for the month.
Investors have been betting on a pre-Easter RBA rates pause since the failure of several banks in the US and the forced takeover of Credit Suisse by its Swiss rival UBS.
Ahead of the RBA's interest rates decision on Tuesday, markets were pricing a pause as a 100% likelihood. (Commercial economists are more divided.) Investors were also expecting a rate cut by early 2024. pic.twitter.com/Tm5tReQC91
— @phannam@mastodon.green (@p_hannam) April 3, 2023
Economists including Judo Bank’s Warren Hogan note that major central banks such as the US Federal Reserve and the Bank of England have pushed through rate increases amid the financial turmoil of bank collapses. The National Bank of Switzerland even pushed through a 50 basis point increase in rates despite dealing with the equivalent of a takeover of NAB and ANZ combined, Hogan said.
The RBA “is the most dovish central bank in the world”, he said.
Hogan predicts the RBA will lift the cash rate by a further 25 basis points on Tuesday and may have another two rate increases to come to prevent inflation becoming entrenched well above its 2% to 3% target over the medium term.
He said the Australian Council of Trade Union’s call for a 7% increase in wages for the lowest-paid employees gaining some indication of government support means the RBA “will have a hell of a time” getting inflation out of the economy.
The latest job vacancy figures, with openings for more than 438,000 jobs as of February, were slightly lower than November’s tally but “was still almost twice the long-term trend”, Hogan said.
Jonathan Kearns, a senior economist with Challenger bank since leaving the RBA in February, said there “could be a couple more” rate rises to come before the cycle ends. With inflation running at 6.8% in February, “real interest rates are absolutely negative”, he said. “It’s still highly stimulatory.”
While Tuesday’s RBA decision is “quite close”, Kearns said he expected “interest rates to remain high for an extended period”.
The “shadow” RBA board of monetary policy experts, coordinated by the Australian National University, estimated the odds of a rate rise on Tuesday as a two-in-three chance.
But Pat Bustamante, a senior economist at St George bank, said on Monday there was “a growing chance that the incoming data will continue to point to an economy that is slowing and slowing quickly”.
“If this is the case, we may have already seen the last hike of this cycle,” he said. “The retail trade and inflation data released last week – two of four key indicators the RBA governor was watching ahead of tomorrow’s meeting – point to a sharper than anticipated fall in spending and inflationary pressures.”
One trend that appears to be turning is the trajectory of property prices. A national home value index compiled by data group CoreLogic found prices ticked up 0.6% in March, the first month-on-month rise since April 2022.
Sydney, which had led the way lower for home prices, is leading the way back up, with a 1.4% gain last month.
CoreLogic’s research director, Tim Lawless, said a range of factors were underpinning the turnaround, including low levels of advertised stock, extremely tight rental conditions and additional demand from overseas migration.
