ANZ Research has stood by its projection of a 25 bps hike to the official cash rate from the Reserve Bank of Australia (RBA) during its monetary policy board meeting on Tuesday, 4 April.
The bank said the cash rate would likely hit a peak of 4.1 per cent following an additional rate rise in May.
This is despite the latest monthly consumer price index (CPI) from the Australian Bureau of Statistics (ABS) reporting annualised inflation of 6.8 per cent in February, down 0.6 per cent from 7.4 per cent in January and the peak of 7.4 per cent in December 2022.
February’s CPI result surprised markets, which had anticipated a 0.2 per cent decline in annualised inflation to 7.2 per cent.
Following the RBA’s last board meeting in March, governor Philip Lowe had hinted at a near-term pause, adding the central bank would monitor labour market conditions, retail sales data, business indicators, and the CPI index before determining its next policy move.
Retail sales increased by just 0.2 per cent in February, following a 1.8 per cent increase, however, business indicators remain strong.
According to ANZ, these latest indicators do not suggest the RBA is on track to achieve its inflation target of 2–3 per cent any time soon.
“While encouraging, the decline in annual inflation so far doesn’t guarantee that it falls back to target under current policy settings,” ANZ Research noted in a statement.
“Indeed, NAB’s Business Survey cost and price growth measures have stopped falling over the past few months and are at levels inconsistent with inflation returning to 2–3 per [cent].
“We continue to expect a 25 bp hike at the RBA’s April meeting and a terminal cash rate of 4.1 per cent.”
Commonwealth Bank has also stopped short of predicting a pause to the RBA’s monetary policy cycle, noting uncertainty surrounding the reliability of the monthly inflation series.
CBA is due to announce its projection for next month’s cash rate decision later this week.
However, other observers, including HSBC chief economist Paul Bloxham, have said the February CPI data has all but locked in a pause to the tightening cycle.
“Today’s monthly CPI indicator data for February provided further evidence that inflation had passed its peak around the turn of the year, with a clear disinflationary trend over the past two months,” Mr Bloxham said.
HSBC’s base case is for a pause to the tightening cycle in April and a terminal rate of 3.6 per cent.
“Our rule of thumb has been that, once the RBA is convinced that inflation has peaked and that the unemployment rate has troughed, the RBA would pause,” Mr Bloxham added.
“We have held our view since January largely based on our view that the domestic economy has been passing a turning point in activity around the turn of the year.”
The HSBC economist also pointed to volatility in global financial markets in response to the collapse of US banks and the downfall of Credit Suisse.
Beyond April, Mr Bloxham said he expects the RBA to hold the cash rate at 3.6 per cent for “a number of quarters”.
HSBC’s sentiment is shared by ING Economics, which has also projected a pause next month.
“…Hard on the heels of the latest policy statement and meeting minutes, which indicated that the RBA was looking for an excuse to pause its tightening, this looks like all the needed excuse,” Robert Carnell, regional head of research, Asia Pacific, said.
“Indeed, if the numbers continue to come in on the softer side, it may turn out that the last rate hike, which took the cash rate to 3.6 per cent, will prove to have been the peak in this cycle.”
But unlike HSBC, ING said it expects the RBA to resume tightening later this year.
“We still have one more rate hike pencilled in for the second quarter of this year,” Mr Carnell added.
“This is looking much less likely now, though given the volatility of the data, we'd like just a bit more confirmation before we strip it out, and are mindful that a pause need not mean the peak.
“Still, it usually does.”
