Close call tipped as Reserve Bank mulls third rate hike
A repeat of the central bank board’s split decision to raise interest rates in March may be on the cards, as the central bank worries about the dual threats of high inflation and a stagnating economy.
Financial markets and most economists are signaling a third straight interest rate hike on Tuesday.
ANZ Bank’s Australian economics chief Adam Boyton is part of the chorus predicting the Reserve Bank will raise the official cash rate to 4.35 per cent, the same level as its post-COVID-19 pandemic peak.
But he thinks it won’t be a misery, as many members are likely to vote in favor of keeping interest rates steady.
The combination of a tight labor market, above-target inflation and concerns about inflation expectations could all point in favor of a raise.
At the same time, the effects of the US-Israeli war on Iran’s economy may convince some board members that more time is needed to weigh the impact on economic growth.
In March, four of the board’s nine members unsuccessfully voted to keep interest rates steady, citing too much uncertainty about the domestic growth outlook and how the conflict in the Middle East would develop.
Mr Boyton said although forward guidance was not expected, uncertainty around the path forward would be reflected in the bank’s post-meeting communications.
“However, we expect a change in the language of the statement after the meeting, which will open the door to a long pause,” he said.
Financial markets on Tuesday pegged the odds of a rate hike at about three-quarters and fully priced in at least one more hike by November.
After May, Westpac predicts two more increases in June and August.
But economists at ANZ, NAB, Commonwealth Bank, Deutsche Bank and HSBC think the Reserve Bank will survive beyond Tuesday.
“Whether the RBA will tighten further after May depends on how quickly the economy weakens,” said Paul Bloxham, HSBC’s chief local economist.
“We see the recent sharp weakening in sentiment as a clear signal that a downturn is already on the way.
“Our base case is for the RBA to remain on hold beyond the increase in May.”
Current economic forecasts, which the Central Bank staff will announce simultaneously with the monetary policy decision, will be closely examined for clues about the future course of interest rates.
Early on Tuesday the Australian Bureau of Statistics will release household spending figures for March.
Economists predict a 1.5 percent increase due to the increase in fuel expenditures.
Building approval figures for March will be published on Monday.
Trend housing approvals have gradually increased since early 2024, reaching just over 210,000 per year.
But the National Housing Supply and Affordability Council has warned that the industry’s slow progress in recent years could be hampered by rising construction material prices as a result of the Iran war.
On Wall Street, the S&P 500 and Nasdaq rose to record closing highs on Friday, boosted by strong earnings and a decline in crude oil prices.
S&P 500 index increased by 20.46 points (0.28 percent) to 7,229.47 points, and Nasdaq Composite increased by 217.67 points (0.87 percent) to 25,109.98 points.
The Dow Jones Industrial Average fell 155.67 points, or 0.31 percent, to 49,496.47.
Australia’s share market broke its worst losing streak since 2018 as oil prices retreated from four-year highs and strong US earnings boosted investor confidence.
The S&P/ASX200 rose 64 points, or 0.74 per cent, to 8,729.8 points on Friday, while the broader All Ordinarys Index rose 67 points, or 0.75 per cent, to 8,954.6 points.
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