RBA set to keep cash rate at 12-year high as inflation stirs anew

Australia’s central bank will likely keep its key interest rate at a 12-year high and stick with it for much of the year to restrain inflationary pressures underpinned by a surprisingly tight job market.

All-but-one of the economists surveyed by Bloomberg expect the Reserve Bank will hold the cash rate at 4.35 per cent for a fourth-straight meeting on Tuesday, while reinstating a hawkish bias to acknowledge sticky consumer prices.

The decision will come on Tuesday afternoon, together with updated economic forecasts. Governor Michele Bullock will hold a press conference an hour after the announcement.

Australia’s policy meeting follows a highly-anticipated decision by the Federal Reserve last week, when chair Jerome Powell kept hopes alive for a rate cut this year while acknowledging a burst of inflation has reduced confidence that price pressures are ebbing. The RBA looks like it may face a similar path.

“The RBA will remain data dependent and will want to keep all options on the table,” said Andrew Boak, chief Australia economist at Goldman Sachs. “The risk of a restart in the tightening cycle has increased but our base case remains for the RBA to start easing in November 2024.”

Ms Bullock has maintained maximum policy optionality this year, saying after the March 19 decision that she isn’t ruling anything in or out and that she needs to be confident that price growth is moving sustainably back to the 2 to 3 per cent target. The RBA has insulated itself by forecasting an extended timeline for inflation’s “last mile”, only expecting it to move inside the band late next year.

Economists, who were forced to recalibrate after worse-than-expected first-quarter inflation, now see a first rate cut in November.

They anticipate Tuesday’s statement will sound hawkish and expect the RBA’s quarterly statement on monetary policy will continue to show that price gains will stay above target through much of 2025, with unemployment seen to remain low.

Money markets are pricing roughly 10 basis points of rate hikes by August, a sharp turnaround from expectations of a rate cut by year end. The rapid repricing caused Australian bond yields to jump across the curve last month, with the policy sensitive three-year notes climbing 42 basis points, the biggest monthly rise since June. Three-year yields traded at 4.04 per cent on Friday.

“Yields in Australia are getting quite enticing for investors across the board,” said James Wilson, a senior portfolio manager at Jamieson Coote Bonds in Melbourne, the fifth-biggest holder of three-year notes.

Data has indicated that Australia’s economy is slowing with GDP contracting on a per-person basis, while tepid retail sales reflect downbeat consumer sentiment.

Last week, supermarket giant Woolworths said it has seen a “noticeable shift in customer sentiment and shopping behaviours since Christmas”. Auto-parts makers Bapcor said days ago that trading conditions in its retail business remain challenging due to weak consumer confidence and lower levels of discretionary spending.

Stubborn inflation is largely to blame. At the same time, the labour market remains tight with unemployment at 3.8 per cent.

That has given policymakers optimism that they can engineer a soft landing — bringing down inflation while holding onto the enormous job gains of recent years. So far, that’s looking achievable with National Australia Bank citing surprising resilience in business credit growth despite elevated inflation and borrowing costs.

It’s a complicated backdrop for the Government as it prepares the ground for an election due by May 2025. Economists say the RBA will need to be mindful of the actions of Treasurer Jim Chalmers who unveils the Budget next week.

“It’s crucial that the Federal Budget remains neutral at best to complement the RBA’s efforts; a stimulatory budget risks undoing the progress made so far in tackling inflation,” said Devika Shivadekar, an economist at consultancy RSM Australia.

She expects the RBA will only make “pivotal decisions” in November after it has seen two more quarterly price prints.

Bloomberg