Will Australia see its first cash rate hike in more than a decade tomorrow?

Highlights

• A cash rate hike by the RBA is likely to take shape soon amidst a sharp rise in inflation.
• Three out of the big four banks expect a rate hike in May, with Commonwealth Bank of Australia (ASX:CBA) tipping a June rate hike.
• Those expecting a June rate hike suggest that the RBA could hold onto the decision ahead of elections.

The Australian economy is eagerly waiting for a momentous decision from the Reserve Bank of Australia (RBA). While the market seems divided on the decision, a rate hike is most likely to be introduced soon. Following the release of worrying inflation data last week, some economists have shifted their rate hike expectations forward to as early as May.

Rising inflation tends to put pressure on the Reserve Bank to raise rates as early as possible. To curb the high money supply in the economy, the central bank often resorts to higher interest rates. This effectively makes borrowing more expensive and reduces the money supply in the economy. Reduced investment and withdrawal of money from the economy help to curb high inflation.

The RBA’s policy decision will be out tomorrow, May 3, when it will meet for its monthly monetary policy decision meeting. With households and experts waiting for tomorrow’s decision, a lot depends on how the central bank proceeds with the policy. If an interest rate hike were to be announced, it would be followed by multiple hikes by the RBA. Thus, borrowers are expected to see their mortgage and interest repayments shoot up in the coming months.

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Why are economists expecting a rate hike in May?

The biggest reason forcing policymakers to push their rate hike forecast forward is March’s biggest quarterly inflation rise in more than 20 years. The data released by the Australian Bureau of Statistics (ABS) showed that annual inflation jumped to 5.1% in the March quarter, while quarterly inflation rose to 2.1%.

The underlying annual inflation has reached 3.7%, well above the RBA’s target range of 2-3%. This has ultimately compelled many economists to revise their forecasts of a rate hike from the previously expected increase in June.

Perhaps the most critical evidence of a May rate hike is presented in the cash rate forecast revision by three of the big four banks. Australia and New Zealand Banking Group Limited (ASX:ANZ), National Australia Bank Ltd. (ASX:NAB), and Westpac Banking Corp. (ASX:WBC) are all expecting a rate hike of 15 basis points in May.

However, the Commonwealth Bank of Australia (ASX:CBA) is expecting a hike in June. Some other market pundits have suggested that a rate hike of as big as 50 basis points could occur this year if the RBA takes an aggressive approach to hiking rates.

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Why do some experts believe that the RBA could remain patient?

Those on the total opposite end of the spectrum believe that it would be too “off-brand” for the Reserve Bank to deviate from its previous stance of being patient with a rate hike. Despite three of the big four banks expecting a May hike, some forecasters believe that the RBA faces the tough task of regaining its credibility in the eyes of the public.

The RBA had maintained a very cautionary stance toward rate hikes for a long, stating that rates would rise in 2024. This ambitious target was met with an abrupt end as surging inflation created havoc across the global economy. It soon became clear that RBA had dangerously underestimated inflationary pressures, which the central bank also admitted.

Consequently, households might have to digest the painful reality of a rate hike coming this year itself. Now, the RBA has a chance to redeem itself in front of the public by holding off the rate hike decision for the next few months.

Additionally, the central bank had also stated that it would wait for both the inflation and wages data before raising the rates. Taking a decision based solely on the inflation data could be contrary to the central bank’s previous statement.

Add to that the timing of the May policy meeting, which is only a few days short of the federal election. This critical timing means that a rate hike decision can factor into the voters’ opinions on the government and, thus, might be avoided completely by the RBA.

Bottom line

Real-world interest rates are already rising, even as the cash rate decision is awaited. Most significantly, fixed-rate borrowing costs are up to unpalatable levels for most households. As lesser mortgages are being taken out, housing prices have already started to decline. Thus, the impact on one of the most critical sectors of the Australian economy has already been achieved. The slowdown in the housing market is expected to be more pronounced once the RBA raises rates.

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