Major banks have updated their expectations for the likely rate hike by the Reserve Bank of Australia (RBA) following the unexpected developments involving inflation, with some projecting a move by the central bank by as early as next week.
According to the Australian Bureau of Statistics (ABS), the Consumer Price Index (CPI) rose 2.1% in the March 2022 quarter and 5.1% on an annual basis.
Meanwhile, the trimmed mean, which is the RBA’s preferred measure of underlying inflation, rose by 1.4% on a quarterly basis, the strongest increase since 2008.
On an annual basis, the trimmed mean CPI accelerated to 3.7%, marking the first time that it has printed above the RBA’s 2%-3% target band.
With these developments on the inflation front, here’s what the big four banks have to say about the upcoming cash rate hike:
ANZ
ANZ head of global economics Brian Martin said the latest CPI inflation came in 'hot' and well ahead of the consensus expectation for a 4.1% growth, which could trigger a shift in the decision of the RBA.
“Given the strong inflation print, and reports from the RBA’s business liaison program that ‘wages growth had continued to pick up in the March quarter’, we don’t think they need to wait for more data on wages to conclude that the current inflation will be sustained,” he said.
“Consequently, we now expect a 15 basis point interest rate hike to 0.25% at next week’s meeting, followed by a 25 basis point hike in June. Eventually we see the cash rate reaching into the 3's.”
CommBank
While CommBank maintained its view that the RBA won't raise the official cash rate until June, it did acknowledge that there is a clear risk that it could raise the cash rate at its next board meeting next week.
“Indeed, the inflation data today indicates that the RBA should raise the cash rate,” CommBank head of Australian economics Gareth Aird said.
However, Mr Aird cited the RBA’s recent minutes, which, in a nutshell, implies that “important additional evidence” should be assessed.
“If the RBA lifts the cash rate at the May Board meeting next week they will have reneged on what they said just last week – namely that the Board agreed that it would take into account evidence on both inflation and the evolution of wages costs as it sets policy,” he said.
NAB
Economists at NAB expect the RBA to raise the cash rate by 15 basis points, taking it to 0.25% at its board meeting next week. Further 25 basis points increases are likely to happen over the next few months, which would bring the cash rate to 1.25% by the end of the year.
“With the RBA’s preferred core inflation measure now well above the top of its 2-3% inflation target range, the market has swiftly moved to bring forward RBA tightening expectations,” said NAB’s currency strategist Rodrigo Catril.
Westpac
The inflation growth and the fall in the unemployment rate from 4% to 3.8% in April are driving Westpac’s prediction of a 40-basis point increase in the cash rate by June.
“Because the current cash rate is an unusual 10 basis points, we had expected that the first move would be 15 basis points to restore the cash rate to 25 basis points,” Westpac chief economist Bill Evans said.
“However, given our expectations of a rapid further increase in underlying inflation and a forecast fall in the unemployment rate for April (to print on May 19) to a 48 year low of 3.8%, we expect the board will decide on a bolder initial lift in the cash rate."
Mr Evans said there is a risk that the RBA would be concerned about this bold move at the beginning of the cycle, as it could potentially impact overall consumer confidence.
“A possibility might be for a more cautious 25 basis point lift in June to be followed by the 40 basis point move in July,” he said.
“However, we anticipate that market and media expectations will shift towards a 40 basis point move over the next six weeks and the anticipated shock to confidence will be contained.”
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