RBA preview: Major banks’ economists divided on June cash rate call

 

The Reserve Bank of Australia is set to deliver its rate hike decision for June tomorrow. After raising rates in May, what are the chances that it will do the same this month?

Economists from the big banks are not all convinced that the RBA would continue the uptrend in cash rate, each with their own arguments based on the latest reading in some crucial economic indicators, mostly about inflation and the recently announced minimum wage award.

On the inflation front, April reading replicated February’s result of 6.8%, marking the first monthly increase in inflation figures in 2023. This was due to rising petrol prices.

Meanwhile, the Fair Work Commission has announced its decision on the minimum wage award, lifting it by 5.75% from 1 July 2023.

How did these recent economic events affect the forecast of the big banks?

ANZ favours a rate hike

ANZ head of Australian economics Adam Boyton said the rate rise decision in either June or July is a line ball decision.

“Given our view that higher rates are more likely and the tendency of the RBA not to delay, at the margin we favour a June rate rise,” he said.

Mr Boyton said the terminal cash rate of 4.1% seems already insufficient to bring inflation back to target in a reasonable period. ANZ’s updated forecast for the terminal cash rate is now at 4.35%.

“We have been highlighting for some time the importance of unit labour costs, which are in essence the combination of wages growth and productivity growth,” he said.

Mr Boyton said it is difficult to see productivity growth over the next year or two returning to roughly 1% pace that appears to underlie the RBAs medium-term inflation forecast.

“Indeed, the strength in hours worked evident in recent months implies that the level of productivity come the June quarter 2023 will be solidly below the level of a year ago and possibly lower than the level that prevailed three years ago before the onset of the pandemic,” he said.

For Mr Boyton, signs of higher or more persistent inflation mattered more for the interest rate outlook than any weakness on the activity side of the economy.

“There is a degree of tension between lowering inflation but not ending up with an unemployment rate much above the non-accelerating inflation rate of unemployment,” he said.

CommBank expects a hold

CommBank head of Australian economics Gareth Aird said while the optics of the annual rate of inflation increasing at a time when the RBA Board want inflation to drop do not look good, the increase still masked a softening trend in the data.

“The bottom line is that inflation continues to decelerate — the upside surprise on the monthly print saw markets price in a slightly higher chance that the RBA increases the cash rate in June,” he said.

“We are mindful that the RBA Board may place some weight on the change in the annual rate due to its influence on inflation psychology and inflation expectations — but overall, we thought the data was encouraging rather than cause for concern.”

“We ascribe a 70% chance to no change and a 30% probability to a 25bps rate increase to 4.10%.”

NAB will not be surprised to see a hike

NAB economist Taylor Nugent said it is a question of “when” not if the RBA will raise rates further.

“NAB’s view has been the RBA will raise interest rates again by August — we have been penciling in a move in July but see June’s decision as line ball, while the risks skew firmly in the direction of a higher peak in the policy rate than 4.1%,” he said.

Mr Nugent said the larger increase in the award wage decision adds to the risks of the RBA’s inflation forecast, which also adds to the likelihood of an increase in cash rate.

“Large nominal wage increases make it harder for the RBA Board to be confident that inflation will return to the top of the target by mid-2025, with upside risk to earlier forecasts crystalised and the risk of broader indirect effects through benchmarking and anchoring across the wage structure more broadly,” he said.

“The RBA’s forecasts of inflation being back to 3% by mid-2025 is already stretching the limits of the RBA’s tolerance.”

For Mr Nugent, the RBA’s decision to pause in April have gone against the case for a higher cash rate made by the data backdrop.

“The decision to pause in April was borne of uncertainties about the outlook, including from the lagged impact of tightening, and a consequent desire slow the cadence of hikes in order to gather more information,” he said.

“GDP data on Wednesday, the day after the RBA meets is dated, but does contain the most comprehensive update on consumption and broader activity — the May employment data could confirm or reject the noisy signal of slowing in April, and the May CPI data will give a clearer picture of whether risks of more persistent services inflation are being realised in the local data.”

Westpac calls for a hold

Westpac chief economist Bill Evans said there is too much uncertainty for the RBA Board to raise the cash rates again this month.

“In particular, the outlook for household spending is very worrying especially with inbuilt lags associated with this unique cycle. An extended pause to allow full evaluation of these lags is the best policy,” he said.

Mr Evans said it would be prudent for the RBA to wait for the national accounts report, given the already rapid increase in rates since May last year.

With regards to the increase in the annual inflation, Mr Evans said the volatility of the month-to-month moves means that the recent results are not sufficiently definitive to trigger an immediate rate response.

“From the perspective of inflation, weakening demand will put significant downward pressure on inflation and eventually ease the demand for labour and therefore the more persistent pressure on services inflation,” he said.

“We remain comfortable with our 4% inflation forecast by year’s end with no need for any further increases in the cash rate.”

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