RBA forecasts suggest 3.85% is the peak

While the 25-bp bump was in line with some of the major banks’ economists, it was a surprise to many who had anticipated a pause was likely.

The central bank’s latest statement has confirmed while inflation has passed its peak, it still remains at a very high level reaching 7 per cent in the March quarter.

Thus, the SMP reiterated that: “Further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable time frame, but that will depend upon how the economy and inflation evolve”.

However, Commonwealth Bank's economist Gareth Aird said the latest forward guidance information indicates that the RBA will increase the cash rate 'only' if economic data comes in stronger than forecasted, suggesting that 3.85 per cent could be the peak.

Mr Aird believes that the RBA will not lift the cash rate again if the economic data print is in line or weaker than their forecasts.

The RBA's latest forecast is for headline inflation to decline to 4.5 per cent by the end of 2023 and to reach 3 per cent by mid-2025.

This would mean the RBA expects a 1.1 per cent/quarter outcome in the second quarter of 2023, which would signal rates should remain, Mr Aird said..

“We do not expect 2Q23 CPI to print stronger than the RBA’s forecasts which is why we have no further rate hikes in our profile,” Mr Aird said.

Looking ahead, Mr Aird expects the economy will slow down more quickly than the RBA has forecast, leading to a rise in the unemployment rate.

“The RBA’s forecast for the unemployment rate to get to 4.2 per cent by mid-2024 looks too optimistic to us,” Mr Aird said.

Despite this, the major bank’s economist believes that the RBA will not hike the cash rate again in this cycle, unless economic data surprises to the upside.

“No economist has a crystal ball and the data could surprise to the upside,” Mr Aird said.

“We think that with inflation receding more quickly than the RBA expects and unemployment rising more quickly the Board will want to take the cash rate down from a deeply restrictive setting to keep the economy ‘on an even keel’ in 2024”.

'Services inflation' a curve ball for the RBA

 Weighing in, Westpac economist Bill Evans said the key theme in the monetary policy statement is the risks around the inflation outlook given the evidence both domestically and offshore that services inflation is slow to fall.

The forecasts show growth for 2023 had been lowered from 1.6 per cent to 1.2 per cent, which reflects weaker outcomes in both household consumption (1.7 per cent to 1.3 per cent) and business investment (3.7 per cent to 2.3 per cent).

However, while it observed weaker growth would put some downward pressure on services inflation - service inflation has remained resilient to date.

“This dilemma appears to have recently become a source of considerable frustration for the board,” Mr Evans said.

He said their policy instrument — interest rates — is doing its job in restraining some demand such as household spending and investment growth but has had “no real success in easing pressures in the labour market or, as is to be expected, boosting productivity”.

“We expect that if there is to be another hike (which is not our current base case) it will come at the August Board meeting when a complete picture of developments in overall inflation and services inflation will be available from the June quarter Inflation Report,” Mr Evans said.

The major bank holds on to its current prediction that the central bank will hold until August.

Meanwhile, AMP economist Shane Oliver has warned of the rising risk of “knocking the economy into a recession”, if the RBA continues to lift the cash rate. 

“so far we have been wrongly too optimistic on this and the risk of a further increase in rates remains very high given the RBA’s concerns about sticky services inflation,” he said following the release of the SMP.

“Our concern though is that the jobs market and inflation are lagging indicators and the RBA is not paying enough attention to the way interest rate hikes hit the economy with a lag.”

[Related: Associaton heads react to RBAs May decision]