Recent strong inflation data, along with the Federal Reserve’s increased hawkishness and global events, has caused a shift in market pricing. Although the money market is currently pricing in no change on Tuesday, it reflects a 40 per cent probability of a rate hike by September.
Similar to the market trends, economists have also become more cautious and adjusted their forecasts to align with their reservations.
The usually conservative Paul Bloxham believes that the change in circumstances will prompt the RBA to consider a rate hike at its meeting on Tuesday.
“We see the upside surprises to inflation and the jobs market as likely to mean that, as was the case at the February meeting, but not in March, the board will be presented with options of holding steady or lifting the cash rate by 25 bp,” the HSBC’s chief economist said.
“We expect that they will decide to keep the cash rate on hold at 4.35 per cent in May. However, we expect the governor to note at the press conference that a rate rise was considered.”
Bloxham maintained his central case, that the RBA will be on hold through 2024, with a shallow cutting phase starting in Q1 2025 with a total 60 bp of cuts throughout the year.
“That said, we see a 40 per cent chance that the RBA could raise its cash rate again in H2 2024 and a risk that the cash rate is on hold for longer than our central case, partly depending on actions by the US Fed,” Bloxham said.
For Scott Solomon, co-portfolio manager of the T. Rowe Price Dynamic Global Bond Strategy, evidence points to the RBA’s policy settings not being restrictive enough to quickly return inflation to target. But whether or not the central bank is forced to hike again, he said, “remains to be seen”.
“The market is now pricing at least the possibility of another hike – the only major market outside of Japan where this is the case. This is partly driven by a prior reluctance to hike as much as the other central banks – thus in a way, there’s a bit of catch-up,” Solomon said.
He opined the governor will very likely return to her cautious stance.
“The view from Philip Lowe’s RBA was to proceed with caution in order to not disrupt full employment and that a little bit higher inflation was a reasonable trade-off. We expect Michele Bullock to maintain this cautious stance at the May meeting and not over-commit either way,” Solomon said.
“To her credit and in line with our expectations, she used the February meeting to successfully push back on the prospects of cuts which now appears to be a very wise move.
“The RBA bore significant criticism by constantly flip-flopping positions in the past and the consistency and open-mindedness demonstrated by Bullock has been appreciated by the market.”
Similarly, MFS Investment Management’s Carl Ang suggested that the RBA may adopt a “hawkish patience” stance in the upcoming meeting, considering the challenges of gradual disinflation, modest labour market cooling, and impending key domestic developments starting mid-month.
The uncertainty, he noted, is likely to be compounded by the upcoming federal budget, minimum wage decision, and statistics on wages and output growth, all of which could further exacerbate RBA concerns about inflation persistence.
“However, the bar for a further cash rate increase still appears high as RBA policy making weighs up the return of inflation to target alongside preservation of employment gains,” Ang conceded.
His view still leans towards future rate cuts with Q1 2025 said to provide “the earliest opportunity”.
Well known for his optimism, AMP’s chief economist, Shane Oliver, said despite talk of a resumption of rate hikes, “our view remains that the RBA will leave rates on hold on Tuesday ahead of a delayed start to cuts latter this year”.
Oliver previously predicted the rate cut cycle to begin in June.
He now shares the belief the RBA will return to a tightening bias on Tuesday, albeit a mild one.
“The return to a tightening bias could be along the lines of the wording the RBA used in February that a ‘further increase in rates cannot be ruled out’,” he said.
While Oliver does expect the central bank to consider further tightening, he said moving to hike rates again would be an “unnecessary overreaction” to the poor March quarter inflation data.
“We continue to see the RBA starting an easing cycle this year but have pushed out the first rate cut to year end,” he said.
The RBA will meet on Tuesday, 7 May, a week before the government delivers the federal budget.
