Australian borrowers face only an outside chance the Reserve Bank will lift its interest rate on Tuesday: markets and most economists are tipping the central bank will extend its pause for a second month.
The RBA board will probably leave its cash rate at 3.6% when it reveals its verdict at 2.30pm (AEST). The central bank broke its record run of 10 consecutive rate rise increases at its April meeting while indicating its job of curbing inflation may not be over.
A wildcard for the current meeting will be how the nine board members assess the impact of the faster-than-expected recovery in net migration that will expand the population by 400,000 this year.
“Members noted that the net effect of a sudden surge in population growth could be somewhat inflationary for a period,” minutes from April’s meeting showed.
“The stronger population growth we’ll be getting is going to be inflationary,” Gareth Aird, head of Australian economics at CBA, said. “This will put more pressure on housing costs.”
CBA, the country’s largest mortgage lender, predicts the RBA will lift the cash rate on Tuesday to 3.85% before starting cuts in November as the economy slows.
CBA on Monday became the latest bank to revise property price forecasts. Instead of projecting national home values would drop 15% from their highs of last year, they now consider the worst to be over, with prices likely to notch a 3% average rise for this year and 5% more next year.
Data firm CoreLogic said its national home value index rose 0.5% in April, adding to March’s 0.6% increase. Sydney prices are now about 3% higher than January’s nadir.
Last week’s release of weaker than forecast inflation figures for the first three months of 2023 was cited by some economists as a key reason why the RBA won’t hike again on Tuesday – and may already have reached its maximum.
Westpac last week shifted its predictions from a possible rate rise on Tuesday to the RBA already reaching its peak.
The bank thinks the RBA’s previous forecasts for underlying inflation of 6.2% for the June quarter and 6.7% for headline inflation will be “easily achieved” since the March numbers came in at 6.6% and 7%, respectively.
“Indeed, our own forecasts have headline inflation back to 4% by December 2023, compared to the [RBA’s] current path which sees it back at 4.8%,” Bill Evans, Westpac’s chief economist said. “Indeed, our weaker growth and inflation path means that the need for further tightening will fade decisively in the second half of 2023.”
Ahead of RBA rates meeting, investors were maintaining their (100%) view that Tuesday's board meeting will leave the cash rate at 3.6%. The next move would be a cut but it'll about a year's time, they think. pic.twitter.com/D3R9yaUbm1
— @phannam@mastodon.green (@p_hannam) May 1, 2023
Warren Hogan, chief economist at Judo bank, said the population spurt “should make [the RBA] very nervous about the level of the cash rate”.
Taking the past six months alone, the annualised population rate was about 2.6%, or the highest since the Australian Bureau of Statistics survey began in 1978, Hogan said.
With many of the newcomers needing rental accommodation, rents were rising at a 10% to 20% clip, depending on the city. That full impact will take time to show up in ABS data since tenants typically negotiate annually, he said.
Other gauges of economic health also remain strong, particularly the labour market. Employers added a net 72,000 full-time jobs in March, leaving the jobless rate near half-century lows of 3.5%.
Job advertisements remain about 50% above pre-pandemic levels even as migrant workers arrive and employers absorb higher borrowing costs, ANZ said on Monday.
@ANZ_Research - Indeed's job ads survey shows only a modest reduction in April. Ads remain more than 52 higher than prepandemic levels and, "absent a major shock, seem unlikely to fall back to historical levels any time soon". pic.twitter.com/3PwCMuZ1OO
— @phannam@mastodon.green (@p_hannam) May 1, 2023
“Although ANZ-Indeed job ads [survey] has fallen to its lowest level since January last year, the volume of jobs created has still been sufficient to absorb a high level of net migration,” Callam Pickering, Indeed’s senior economist, said. “Graduate-related job ads were 24% higher during the first quarter, compared with a year earlier.”
ANZ expects Tuesday’s RBA decision to be a close one, with one more rate hike to come in August.
