Big bank economists divided on RBA’s next move

The Reserve Bank of Australia (RBA) is set to decide on the fate of the cash rate on 5 April 2023 but economists from the big banks seemed divided on the possible move by the central bank.

The RBA made its tenth consecutive increase in its March meeting, moving the cash rate to 3.6%.

One of the biggest factors influencing the forecasts of major banks is the significant cooling of the Consumer Price Index.

According to ABS, the annual inflation went down from 7.4% to 6.8% in February, which was in line with the RBA’s sentiment that inflation has already peaked.

CommBank and Westpac economists are calling in for a pause in rate hike while those from ANZ and NAB still predict a rate rise for April.

Here’s what the economists from each of the big bank has to say:

ANZ

For ANZ economists, inflation momentum remains strong and is not slowing as much as the fall in annual inflation would suggest.

ANZ senior economist Catherine Birch said the level of inflation would likely push the RBA to raise the cash rate by another 25bps for April.

“Looking more broadly at the set of data reports the RBA has highlighted as guiding their decision at the upcoming meeting, we see ongoing resilience,” she said.

“The labour force report showed a large bounce in employment and a drop back in the unemployment rate to 3.5%. Retail sales were softer at 0.2% month-on-month, however services spending captured within retail sales remained solid.”

CommBank

Economists from CommBank said there is a 55% chance for the RBA to call in a pause for the month of April.

CommBank head of Australian economics Gareth Aird said there seems to be a change in the rhetoric of the RBA, which now points to a pause given that the monetary policy is already in a “restrictive territory”.

“Note that all of this communication predates the recent turbulence in global financial markets due to some concerns in pockets of the banking system,” he said.

“Reading between the lines, it is clear that the RBA would like to pause the tightening cycle.”

Mr Aird said the RBA Board would also likely consider the sufficient signs of slowing in the domestic economy, especially with the recent showing in the monthly CPI indicator.

Still, if the RBA ended up pausing, this would not mean the end of the tightening cycle.

“The RBA Board can pause in April while retaining full optionality to raise the cash rate in May if the data comes in a little hotter than anticipated over the next month, particularly the CPI for the first quarter of 2023,” Mr Aird said.

“A pause therefore in April coupled with a hiking bias makes a lot of sense — and that is now our base case.”

Given this prediction, Mr Aird said a terminal cash rate of 3.85% for this cycle is still possible.

NAB

NAB economists expects the RBA to make a line-ball decision to raise the cash rate to 3.85% in April.

NAB group chief economist Alan Oster said it has been increasingly clear that interest rates are nearing its peak.

“The labour market remains very tight, inflation is well above target and the risks on wage growth remain to the upside,” he said.

“However, activity is also slowing as post-COVID momentum fades and the monthly CPI appears to confirm RBA and market expectations that inflation has passed its peak.”

Mr Oster said the key question for the central bank now is whether the current level of interest rate is sufficiently high to ensure inflation sustainability returns to target in a reasonable time frame.

“In part, this depends on wage pressures remaining contained and expectations for inflation staying anchored,” he said.

For Mr Oster, the most likely scenario is for the cash rate to peal at 3.85%, partly factoring in the global events in the financial sector.

Still, if the RBA could still push through with a peak of 4.1%, given the resilience in business confidence and the changes in wage growth and inflation over the first quarter of the year.

“With rates now closer to their peak, it is unsurprising that the outcome of the next meeting is line-ball,” Mr Oster said.

“While these data have provided somewhat mixed signals, in our view they remain in line with the RBA’s central forecasts and as such are supportive of a further 25bp increase.”

Westpac

Westpac expects the RBA to pause the rate hike cycle in April before increasing the cash rate again by 25bps in May.

Westpac chief economist Bill Evans said there is arguably a preference for pausing based on the recent minutes of the RBA Board meeting.

“And note that this “preference” was revealed prior to the developments in the global banking system,” he said.

On top of the sharp fall in business conditions, the muted increase in retail sales, and the annual fall in inflation, the RBA will also have to consider the global economy.

“While markets have stabilised the clear risk of credit tightening in the US and Europe as US regional banks deal with increased regulation and deposit instability in both US and Europe lowers the outlook for global growth,” Mr Evans said.

“Given these issues the appropriate policy for the Board is to pause to await clearer information.”

Mr Evans said that by May, the RBA will have the benefit of “refreshed forecast”, including the time required to return to the 2-3% target zone for inflation which we think is likely to remain at a distant mid–2025.

“In an economy with full employment that is still too high and we expect a final 25bps lift in the cash rate will be required,” he said.

“Much better to make that decision with the benefit of a true indication of the inflation challenge along with the other benefits of another month of data, including around global developments, than needing to move in April.”

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