Market Preview – RBA Rate Decision

The Reserve Bank of Australia is set to announce its decision on interest rates on Tuesday. The consensus is for the bank to keep interest rates unchanged; however, it is a close call.

Forecasts suggest a coin-flip as 16 out of 31 economists surveyed by Reuters expect another 25bps and 15 predict a pause at the current 4.10% level.

The meeting and subsequent comments by officials initially spurred some hawkish adjustments to rate forecasts, including Goldman Sachs which raised its view for rates to peak at 4.85% in September from a prior view of 4.35% in July.

NAB has also adjusted its call for rates to peak at 4.60% from 4.35% through back-to-back hikes in July and August, further showing that there is not big one-way consensus here.

Following the recent strong Australian Labour Force report, the interest rate market is currently pricing in a 50% chance of a 25 bp rate hike at the RBA’s July meeting, which would take the cash rate to 4.35%.

CPI showed a modest slowdown in the annual rate to 5.6% in May; however, other core measures slowed less significantly to 6.1%. These inflation numbers cooled expectations for another rate hike.

At the last meeting, the committee said it remains resolute in its determination to return inflation to target and will do what is necessary to achieve that. The central bank also increased the interest rate on Exchange Settlement balances by 25 basis points to 4.0%.

Another surprise hike cannot be ruled out as inflation remains a distance from the central bank’s 2-3% target range and considering that the central bank has gone against the consensus for a pause at the last two meetings.

For the record, I think the RBA will hike rates by 25 basis points in July and again in August, taking the cash rate to 4.6%.