After an unprecedented 350 basis points (bp) of tightening over 10 consecutive meetings, speculation on whether the Reserve Bank of Australia (RBA) will maintain its current stance or opt for a pause is intensifying.
According to a recent note by HSBC Australia chief economist Paul Bloxham, not only could the bank announce a pause at its upcoming meeting in April, but it could hold rates at 3.60 per cent for “a number of quarters”.
“Our view is primarily about our expectation that the economy passed a turning point in activity, the jobs market, and inflation around the turn of the year. In addition, it reflects our assessment of the RBA’s reaction function,” he explained.
“We see the RBA prioritising a soft economic landing, even if this means above target inflation for a while. The recent global banking developments are likely to help the case for an RBA pause,” Mr Bloxham said, adding that HSBC does not expect the central bank to cut rates any time soon.
As the RBA’s next rate decision approaches, Commonwealth Bank economists indicated in a recent economic update that they are placing significant weight on upcoming domestic data in their forecast, with the April meeting still considered to be “live”.
While the big four bank has pencilled in a 25 bp rate hike next month, CBA head of Australian economics Gareth Aird said that upcoming data could “make or break” the case for a pause.
“We believe the board would like to pause in their tightening cycle next month. And we think that is the appropriate policy response given only ~45 per cent of the increase in the cash rate to date had passed through to scheduled mortgage repayments at the end of 2022,” he said.
“But the board may feel the need to put through another 25 bp rate hike in April if the domestic data next week prints on the firmer side given the strength in the February labour force data and the latest NAB business survey.”
The two remaining pieces of data that are set to inform the RBA’s decision are retail trade figures due on Tuesday and the monthly consumer price index (CPI) indicator on Wednesday.
CBA forecasted the monthly indicator to lift by 0.4 per cent over the month of February, easing the annual pace of inflation down from 7.4 per cent to 6.9 per cent.
Looking further ahead, CBA predicted 50 bp of rate cuts could take place later this year, followed by a further 50 bp of cuts in the first half of 2024.
Uncertainty persists for interest rates
Although HSBC currently anticipates a “long pause” from the RBA, Mr Bloxham cautioned that there remains significant uncertainty regarding the central bank’s future actions.
“With all this uncertainty — we have tried to cut through the detail, and are using a simple rule of thumb for thinking about the RBA’s reaction function,” he stated.
“That is, once the RBA is convinced that inflation has peaked and that the unemployment rate has troughed, we expect them to pause.”
While he acknowledged that jobs growth was strong during February, Mr Bloxham argued that this followed a period of weakness.
On inflation, Mr Bloxham said that the February monthly CPI indicator was expected to confirm that inflation was now past its peak.
“Beyond the domestic story, our view is supported by the recent global financial developments. We expect that the US and European banking sector challenges are likely to see more tightening of financial conditions than would otherwise have been expected,” he added.
“In short, they do some of the work for offshore central banks and increase the risk of a steeper global downturn. This should help to deliver more global disinflation and thereby assist the RBA in seeking to lower local inflation faster.”
Over the longer term, Mr Bloxham said that domestic wages pressure or higher inflation could drive the RBA to tighten a bit further, against HSBC’s expectations, while a bigger global downturn and global disinflationary impulse could see the central bank cut sooner.
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
