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Will the RBA hold or fold at the June meeting?

By Hanan DervisevicMarket OverviewJun 05, 2023 16:08
Will the RBA hold or fold at the June meeting?
By Hanan Dervisevic   |  Jun 05, 2023 16:08
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For mortgage holders, the end of interest rate increases and rising home loan repayments is still up in the air as market pricing puts the chance of a rate hike in June at 37%.

Key points
  • Major bank economists are split on whether the RBA will hike or pause at the 6 June meeting - CBA, Westpac predict a pause while ANZ, NAB expect a 0.25% hike.
  • High inflation and poor productivity continues to influence the RBA's decision on the cash rate.
  • ANZ has forecast two more 25 basis point increases by August, taking the terminal rate to 4.35%.
  • Internal modelling from RBA revealed cash rate would need to be 4.8% if it's to hit its underlying inflation target by 2025.

The arguments for a rate hold in June remain largely the same: a pause is needed to get a clearer picture on demand and inflation, the domestic economy is showing signs of slowing, and the full extent of the impact of rate tightening is yet to be felt entirely.

However, not all economists agree with some arguing a 25 basis point lift will be revealed tomorrow.

Freedom of Information requests put forth to the RBA on 11 May revealed internal modelling showed the cash rate would need to be 4.80% if underlying inflation were to hit 2.5%, or within the RBA's target, by 2025, accounting for an unemployment rate of 4.5%.

The Fair Work Commission’s decision to increase the minimum wage by at least 5.75% forced some major economists to update their cash rate forecasts as the boost could add to the risk of higher inflation.

AMP Chief Economist Shane Oliver said a rebound in inflation tied with the latest award wage increase and poor productivity is likely fuelling the RBA’s concern that high inflation is here to stay for longer.

“The Fair Work Commission’s decision to increase award rates of pay by 5.75% and the still tight labour market means its looking increasingly likely that wages growth (now running at 3.7%yoy) will push beyond the 3 to 4% comfort zone,” Mr Oliver said.

“This is at a time when productivity is very poor adding to the risk of further upwards pressure on unit labour costs.

“So following the April inflation data and the further step in minimum and award wages growth, the risk is now very high that ongoing inflation and wages concerns will see the RBA overtighten and knock the economy off the narrow path.”

Dr Oliver is now allowing for another 25 basis point hike in the cash rate on Tuesday, taking it to 4.1%. If the RBA throws an unexpected curve ball and decides to hold, Dr Oliver is pencilling in a July increase.

The ABS Consumer Price Index (CPI) revealed that in the 12 months to April, inflation rose to 6.8% - up from the previous reading of 6.3%.

On Friday morning, before the minimum wage decision, ANZ economists revised their forecasts, tipping two successive interest rate rises this month and next, pushing the final cash rate to 4.35%.

As it currently stands, CommBank and Westpac expect the cash rate to hold at 3.85% in June while ANZ and NAB predict a 0.25% increase to 4.10%.

ANZ economists the most hawkish of them all

ANZ Head of Economics Adam Boyton said the major bank no longer sees a terminal cash rate of 4.1% as sufficient enough to bring inflation back to target in a reasonable time frame.

“Given our view that higher rates are more likely and the tendency of the RBA not to delay, at the margin we favour a June rate rise,” Mr Boyton said.

“The inflation ‘challenge’ in Australia is not the pace of wages growth, but the weakness in productivity growth that has pushed up unit labour costs.”

NAB economists tip a 25 basis point increase

NAB Economist Taylor Nugent said it is a question of when, not if the RBA will raise rates further.

“We see the June meeting as very live and we wouldn’t be surprised to see the RBA lift rates on Tuesday,” Mr Nugent said.

“NAB’s call has been for the cash rate to reach 4.1% by August, with July most likely and the risks skewed to a higher peak.”

CommBank retains its call: pause is likely

CommBank Head of Australian Economics Gareth Aird said while the June Board meeting is now ‘live,’ there is a 70% chance the RBA holds this month.

“The bottom line is that inflation continues to decelerate,” Mr Aird said.

“We are mindful that the RBA Board may place some weight on the change in the annual rate due to its influence on inflation psychology and inflation expectations.

“But overall we thought the data was encouraging rather than cause for concern.

“We believe the domestic economy is now showing sufficient signs of slowing and we expect the RBA Board will judge that leaving the cash rate on hold is the appropriate policy move in June.”

CommBank predicts the cash rate to reach a peak of 3.85%, but the near term risk does sit with another hike.

Westpac economists stick to their guns: pause in June

Despite incorrectly predicting last month’s cash rate increase, Westpac Economist Bill Evans has once again pencilled in the RBA to hold the cash rate steady in June.

“There is too much uncertainty for the RBA Board to raise the cash rate again next week,” Mr Evans said.

“In particular, the outlook for household spending is very worrying especially with inbuilt lags associated with this unique cycle.

“An extended pause to allow full evaluation of these lags is the best policy.”

Mr Evans also said a pause would be prudent given the release of the national accounts report which details important updates on the savings rate, productivity, and labour costs.

"Will the RBA hold or fold at the June meeting?" was originally published on and was republished with permission.

Will the RBA hold or fold at the June meeting?

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