The arguments for a rate hold in May remain largely the same: inflation has begun to cool, and consumer sentiment has plummeted, but not enough to completely rule out a future hike in the coming months. 

The ABS Consumer Price Index (CPI) revealed that in the 12 months to the March 2023 quarter, inflation was 7.0% - down from the previous reading of 7.8%.

While inflation figures are still too high for the RBA’s comfort, a higher than expected decrease in the March CPI data suggests the 10 consecutive rate hikes are beginning to take their intended effect, prompting another possible rate pause next week.

Despite reprieving mortgage holders of a rate rise in April, RBA Governor Philip Lowe reminded Aussies a pause did not signal an end to the tightening cycle all together. 

“The Board expects that some further tightening of monetary policy may well be needed to ensure that inflation returns to target,” Dr Lowe said.

“In assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market.”

AMP Chief Economist Shane Oliver said lower than expected March quarter inflation (CPI 7% vs RBA forecast of 7.4%) should help provide scope to continue the pause on rates next month.

"RBA concerns about stronger population growth adding to housing, inflation and risks to wages growth make it a close call," Dr Oliver said.

As it currently stands, ANZ, NAB, and Westpac expect the cash rate to hold at 3.60% in May while CBA sits alone on the other side of the fence, predicting a final 25 basis point boost.  

Either way, all big-four banks are in agreement the RBA is finished with any significant rate hikes, such as last year’s four 50 basis point increases.

Inflation figures point to a pause in May: Westpac

Westpac Chief Economist Bill Evans said following the release of the March quarter inflation report, the major bank now expects the Board to extend the pause it instigated at its April meeting to the May meeting.

“We have always argued that May would likely be the peak of the tightening cycle so we are now lowering our forecast cash rate peak from 3.85% to 3.6%,” Mr Evans said.

“Given the uncertainty around the current outlook and a need to contain inflation expectations, the Board is almost certain to maintain its clear tightening bias.

“However, as we move through the remainder of 2023 the credibility of that bias is likely to fade.”

Despite upgrading its peak cash rate forecast to 3.60%, Westpac believes its previous terminal forecast of 3.85% would be the better policy approach given the risks of record low unemployment and very high inflation.

ANZ economists u-turn, forecasting a pause in May

ANZ Senior Economist Adelaide Timbrell said a decrease in trimmed mean inflation supports the view for a rate pause in May.

“Trimmed mean inflation and the monthly CPI indicator were both lower than expected, supporting our view that the RBA will keep the cash rate at 3.6% in May,” Ms Timbrell said.

“Looking further ahead, though, persistently strong services inflation, reflecting excess demand in the economy, suggests that more RBA tightening will be needed in coming months.”

NAB suggests RBA is done with rate hikes

NAB economists have revised their cash rate forecast once again, predicting the RBA will hold the cash rate at 3.60% throughout 2023.

“We further trimmed our rate expectations in the month, expecting the RBA to remain on hold until mid-2024, before rates are cut back towards neutral,” NAB economists said. 

“We acknowledge the risk of further rate rises remains – especially if inflation or wages surprise to the upside – but the slowing data flow is likely to make rate rises harder to justify as time goes on.”

CBA retain their call: 25 basis point hike incoming

CBA Head of Australian Economics Gareth Aird expects a 25 basis point increase next Tuesday, yet notes it’s another line ball call.

“We retain our call for the RBA to increase the cash rate by 25 basis points to 3.85% at the May Board meeting, our forecast for the peak in the cash rate,” Mr Aird said.

“Money markets disagree with our view. As we go to press just 3 basis points are priced for the May Board meeting (i.e. a 12% chance of a 0.25% rate increase).

“It is not the first time we have gone into a Board meeting with a call not supported by the markets and undoubtedly it won’t be the last.”

CBA economists ascribe a 55% chance to a 25 basis point rate increase and a 45% probability to no change.


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