Leading economists at all four major banks are now predicting the Reserve Bank of Australia will leave interest rates on hold at 4.35 per cent on Tuesday following its regular meeting.
Members of the RBA’s Monetary Policy Board head into their two-day meeting this afternoon for their all-important decision on whether borrowers will get interest rate relief.
Top of mind will likely be what will become of the Middle East ceasefire and whether it will drive down fuel prices, the ever-present problem of inflation and the looming restoration of the full fuel excise at the end of the month.
Going into the meeting, all signs point to a decision to hold, with top economists from CBA, ANZ, NAB, Westpac and HSBC predicting rates will remain the same.
Westpac chief economist Luci Ellis, who formerly worked at the RBA advising the board, as late as Friday reaffirmed her view the board would hold.
“Although inflation remains above target, the previous three rate increases have given the monetary policy board time to assess cross-cutting trends of weak consumer and housing markets versus high inflation pressures and a secular boom in data centres and related investment,” she wrote in an economic update from the bank.
“The recent run of inflation and labour market data has been a bit mixed, supporting the case for a pause.”
She has predicted rate rises in August and September instead.
Luci Ellis is tipping two more rate hikes before cuts next year. (
ABC News: John Gunn
)
Dr Ellis’s prediction of rate rises is at odds with other major economists, who are suggesting that the country is in for a prolonged pause on interest rates with forecasts predicting there will not be any relief on mortgages until the third quarter of 2027.
On Friday, Paul Bloxham, chief economist at HSBC, said he expected the RBA to keep the official cash rate”firmly on hold” in June.
“Inflation is still too high and is set to rise further before it falls. That being said, the RBA has already taken significant action to deal with this surge in inflation — and, critically, the action is working,” he wrote in an economic update.
The combination of the rate hikes, fuel crisis and tax policy changes in the federal budget were all hits to the economy, he said.
The big driver of these views was that business confidence and consumer sentiment indicators were turning downwards and that was likely to lead to less spending all round.
“Although there is some risk the RBA might choose to hike again beyond that, we expect the weakening in growth to convince them to be on hold,” Mr Bloxham said.
Strait of Hormuz will take time to fully open
Even as Iran and the United States come to some sort of peace deal, economists point out that it will take many months for shipping in the Strait of Hormuz to ramp up to pre-war levels, and this will keep pressure on fuel prices.
“While markets are increasingly pricing a faster resolution, our base case for the reopening of the Strait of Hormuz and Gulf oil supply normalisation remains broadly unchanged,” Dr Ellis said.
“We continue to assume shipping rises to around 10 per cent of normal levels by end-June, with full normalisation not occurring until mid-2027.“
Despite this, fuel markets remain optimistic with Brent crude trading at $87.33 a barrel on Sunday, a 3.5 per cent drop and well below the $100 mark.
But it was still 20 per cent higher than the pre-war level when it was about the $70 mark.
Crude oil was similar, trading at $84.88, down 3.23 per cent.
Are more rate rises to come?
Dr Ellis certainly thinks so, tipping rate rises in August and September despite lower fuel prices and slightly better than expected inflation figures.
“This slightly lower track for underlying inflation is still higher than the RBA’s own forecasts,” she said.
Headline inflation decelerated in April, with consumer prices increasing at an annual pace of 4.2 per cent, down from 4.6 per cent in March.
Trimmed mean annual inflation, which is the Reserve Bank’s preferred measure of underlying inflation, was 3.4 per cent in the 12 months to April, slightly up from 3.3 per cent in March.
“While ever inflation trends are this far away from the 2.5 per cent target midpoint and showing little tendency to decline, the Monetary Policy Board will regard soft outcomes for the consumer and housing sectors as being a necessary part of the transmission of monetary policy,” Dr Ellis said.
These two rises would be followed by two cuts in 2027, she said.
ANZ, on the other hand, has softened its prediction of only a prolonged pause, and has added to its outlook two 0.25 per cent cuts in 2027, as has CBA.
Sally Auld says the next rate move is likely down but it’s not clear when, tipping a hold in June. (ABC News: Chris Taylor)
NAB is even more optimistic, predicting three cuts in 2027.
NAB chief economist Sally Auld said that would take the cash rate back to where it was at the start of this year: 3.6 per cent.
“The next move in the cash rate is likely to be down, but the timing is uncertain,” she said.
They are even predicting the first cut could be before July next year.
“However, we are cognisant that there is still considerable uncertainty around the outlook, both with respect to activity and inflation.
“We have greater conviction that the next move in rates is down, but less conviction on the timing.“
Most economists suggest cuts will not happen until the second half of 2027, meaning households will have to keep the budget on pause for some time to come.
