Lenders adjust forecasts before RBA May decision

With the Reserve Bank of Australia’s (RBA) next monetary policy meeting due tomorrow (2 May 2023), lenders have weighed in with their updated cash rate forecasts.

The revised forecasts come following the release of the Australian Bureau of Statistics’ (ABS) Consumer Price Index (CPI) data for the quarter ending March 2023. The ABS data revealed that inflation has fallen from its peak to 7 per cent over the 12 months, after reaching a 33-year record high of 7.8 per cent in the December quarter.

Notably, the RBA has been steadfast in bringing down high inflation to the target 2–3 per cent range, with RBA governor Philip Lowe stating that the March quarter CPI figures would play a determining factor in the Reserve Bank’s decision on whether to once again hold the cash rate or continue rising.

Westpac chief economist Bill Evans has stated the major bank now expects the RBA to extend its pause in the May meeting.

While Westpac has “always argued” that May would likely be the peak of the tightening cycle, the major bank has lowered its forecast for a cash rate peak from 3.85 per cent to 3.60 per cent (where it currently sits), following the release of the March quarter inflation report.

“Given the uncertainty around the current outlook and a need to contain inflation expectations, the board is almost certain to maintain its clear tightening bias. However, as we move through the remainder of 2023 the credibility of that bias is likely to fade,” Mr Evans said.

ANZ also expects another pause in May due to the March quarter CPI report showing trimmed mean inflation running lower than expectations.

“Headline CPI was a touch higher than our expectations, but the 1.4 per cent quarter-on-quarter and 7.0 per cent year-on-year print was, in our view, either consistent or even little better than what the RBA was anticipating, based [on] their February forecasts,” it said.

National Australia Bank also has backed a pause for this month.

The Commonwealth Bank of Australia (CBA) has retained its call for the central bank to increase the cash rate by 25 bps to 3.85 per cent during the next meeting, staying consistent with their peak cash rate forecast, however, the major bank acknowledged that it’s “a very close call”.

“We ascribe a 55 per cent chance to a 25bp rate increase and a 45 per cent probability to no change (we consider the risk of any other move immaterial),” the bank stated.

AMP Bank chief economist Shane Oliver stated falling inflation should “enable the RBA to remain on hold in the week ahead”, however, he also said it would be a close call.

“While another RBA hike on Tuesday can’t be ruled out given RBA concerns about wages growth and faster population growth adding to housing related inflation and rising wealth, on balance we expect the RBA to leave rates on hold for May with the faster than expected fall in inflation providing it with greater scope to continue the pause in order to better assess the impact of past rate hikes,” Mr Oliver said.

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