May rate hike still on the cards: RBA

Following the decision to pause the official cash rate at 3.60 per cent during the Reserve Bank of Australia’s (RBA) board meeting this month (breaking the streak of 10 consecutive cash rate hikes beginning last year), the RBA’s latest monetary policy minutes have indicated that the central bank thinks there is a possibility of a further hike in May 2023. 

The minutes, released on Tuesday (18 April), revealed that members “agreed that there was a stronger case to pause at this meeting and reassess the need for further tightening at future meetings”.

However, the minutes showed that members agreed that it would be helpful to have “additional data and an updated set of forecasts before again considering when and how much more monetary policy would need to be tightened to bring inflation back to target within a reasonable time frame”.

According to the RBA, this would include:  

• Another quarterly reading on inflation
• Additional monthly readings on the labour market
• Household spending and business conditions
• Further information on developments in the global economy and financial markets

According to the Commonwealth Bank of Australia’s (CBA) Economic Insights report on the April board minutes, the incoming Consumer Price Index for the first quarter of 2023, set to be published next week on 26 April, could “make or break” the case for the RBA to raise the cash rate at the board meeting. 

CBA noted that the minutes reflected that the RBA believes it will probably raise the cash rate, however, is not sure “that it will be necessary”. 

“Members agreed that it would be helpful to have additional data and an updated set of forecasts before again considering when and how much more monetary policy would need to be tightened to bring inflation back to target within a reasonable time frame,” the minutes stated. 

Westpac chief economist Bill Evans stated the case for an increase “is much strong than was the case for the April meeting”, citing three “subtle clues” that the RBA might decide to lift the cash rate. 

“Firstly, unlike the minutes in March, the board did not specifically commit to considering a pause at the next meeting,” Mr Evans said. 

“Secondly, it qualifies the message from market pricing which is pointing to an extended period of rates on hold ‘as was the case abroad market pricing reflected an average of both upside and downside scenarios’.”

Mr Evans noted the final clue implicated the central bank’s preference for higher rates in the comment: “Members noted that the forecasts produced by the staff in February had inflation returning to target range only by mid-2025 and that it would be inconsistent with the Board’s mandate for it to tolerate a slower return to target. These forecasts were conditioned on monetary policy being tightened a little further.”

ANZ head of Australian economics Adam Boyton stated in the latest ANZ Research Quick Reaction Australia that the decision to pause in April was “a relatively close one” with a case being able to be made for both a rate hike or hold. 

“It further suggests that the May meeting is live — with the board in a position to be persuaded either way based on the balance of the data and the updated set of forecasts they will receive at that meeting,” Mr Boyton stated. 

[RELATED: April cash rate holds at 3.60%]