RBA tipped to increase cash rate tomorrow by 0.25%
While some market economists are forecasting a 40 basis point increase, most are expecting a 0.25% increase to the cash rate from the Reserve Bank tomorrow.
Reserve Bank of Australia (RBA) is tipped to raise the cash rate from between 25 to 40 basis points tomorrow, resulting in an official rate of 0.6% or 0.75% and another rise in variable interest rates for homeowners and businesses.
Based on RBA governor Philip Lowe’s remarks last month — when the cash rate was increased for the first time in 11 years — it’s likely the RBA will increase it by 25 basis points.
“In the past, 25 basis points was the standard amount we moved. We deviated from that in various times in the past because circumstances required it, but 25 basis points is the standard move,” Lowe said, adding that “it doesn’t preclude a bigger or a smaller number in the future”.
Lowe also said that “an argument for an increase of 40 basis points could be made given the upside risks to inflation and the current very low level of interest rates”, but a 25 basis point increase was generally preferred.
While some market economists are forecasting a 40 basis point increase, head of Australian economics at Commonwealth Bank Australia (CBA) Gareth Aird said in a report that CBA expected a “business as usual” 0.25% increase, but acknowledged a risk of the RBA opting for a large 0.4% increase.
“We assign a 75% probability to a hike of 25bp and a 25% chance to a 40bp increase,” the report said, adding that a rate hold or an increase beyond 0.25% or 0.4% was unlikely and negligible.
CBA believes a 0.25% hike is likely based on three data publications which will inform RBA’s decision tomorrow. These include the Q1 22 Wage Price Index (WPI) report, the April labour force survey and the Q1 22 national accounts. The election and change of federal government are also part of the deliberation.
Meanwhile ANZ’s head of Australian economics David Plank noted: “We think an upward surprise of 1% quarter-on-quarter growth in tomorrow’s WPI could be enough to get the RBA over the line for 40 basis points, though if it comes in at our forecast of 0.8% quarter-on-quarter, that prospect will recede.”
Richard Holden, Professor of economics at UNSW Business School, told SmartCompany that it’s likely to be one of three outcomes: a 0.25%, 0.40% or 0.50% increase.
“They’re [the RBA] on a path to knock inflation on the head, and they’re going to have to increase quickly,” he said.
“We’ll end up with a cash rate of 2.5% to 3% in the next eighteen months to two years, and we’re on the path to getting there.”
Muheed Jamaldeen, director at Delloite Access Economists noted that whether or not the rate goes up tomorrow, Delloite’s 90 day bill rate points to a 0.8% increase in the interbank lending rate by the end of the year, which means a cash rate increase through the year.
“Inflation is on the rise, so the RBA is acting. Currently global inflation is being driven by the geopolitical situation and supply chain issues, which have driven up commodity prices,” Jamaldeen told SmartCompany.
“Wages are also increasing, but it has not outpaced inflation,” Jamaldeed said, adding that may mean inflation is transitory.
“Globally speaking, Australia is doing pretty good compared to other OECD countries. Inflation is still under control here, broadly speaking.”
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