Why this big four bank is optimistic the RBA will hold rates

ANZ expects the Reserve Bank will keep interest rates on hold for months after three inflation-fighting hikes this year.

The big four bank’s optimism will be welcome news for borrowers who would be paying $272 a month more on a loan of $600,000 after the consecutive rate rises.

Financial markets also tip the RBA will leave the cash rate unchanged at 4.35 per cent in June.

“Our expectation remains that the board will pause in June,” ANZ’s Aaron Luk said.

He said a split five-four vote in March suggested some RBA board members preferred to wait for quarterly meetings when updated economic forecasts are released before moving.

“By August, we expect the activity data to be looking sufficiently soft to keep the RBA on hold.”

Higher interest rates and an oil shock generated by the Middle East war are expected to slow demand and lower economic growth.

Mr Luk said core inflation of 0.8 per cent in the year to March had been lower than the RBA expected and the impact of higher oil prices driving up prices for other consumer products was only likely to emerge later.

The RBA’s latest forecast also expects growth to slow to just 1.3 per cent, which governor Michele Bullock described as “anaemic”.

Ms Bullock’s comments to journalists after the meeting last week signalled the board would not be rushing into further hikes without more evidence.

“The board now feels that the initial conditions that we were trying to address before the war started . . . where we needed to get demand to slow so that it was putting less pressure on inflation . . . we’re now in a position where we’ve got space to be alert now to both sides of the risks,” she said.

“(Both) inflation and the potential risks to the downside if the war continues.”

The cash rate was now “a bit restrictive” and would help address inflation, she said.

“This gives the board space to see how the conflict plays out and the response of Australian households and businesses to the shock,” Ms Bullock said.

Rate hikes will have a much wider impact than just homeowners paying mortgages.

The Aussie dollar has been trading close to the highest level in four years, which will weigh on earnings for exporters such as farmers.

Businesses competing with offshore producers, like in manufacturing, are also set to take a hit as imported items will be cheaper.

Retailers and hospitality businesses should expect weaker demand as households funnel more cash into mortgages and fuel.