There is no doubt the Reserve Bank of Australia will pull the trigger on another rate hike on Tuesday to cool soaring inflation, however the size of the move remains a point of contention.
Just five weeks after raising the cash rate for the first time in over a decade, money markets anticipate the RBA will lift it again — this time by 25 or 40 basis points — and have priced in a series of rate rises that would take rates above 2 per cent by the end of this year.
Independent economist Saul Eslake on Monday said he felt “genuinely uncertain” about how much the cash rate (currently at 0.35 per cent) would rise.
He noted the RBA’s decision to hike the cash rate by 25bp on May 3 was a way of indicating it was returning to “more normal operating procedures”.
“I didn’t find that a very helpful explanation so I’m genuinely unsure now as to whether another step to normality . . . means another 25, or does it mean getting back to (15)?” he said.
Mr Eslake said one key difference between the RBA and comparable central banks that had opted for bigger rate hikes was that the RBA met more frequently, which could justify incremental moves.
He noted the RBNZ and Bank of Canada had both raised the cash rate by 50bp twice, and the US Fed had opted for 50bp once but signalled it would hike by that much again at least twice.
“The RBA can do 25 at each (meeting) and probably do as much over a six month period as some of the others who might do 50 but less often. So I wouldn’t say 40 is impossible, but it wouldn’t be my top pick,” he said.
KPMG chief economist Dr Brendan Rynne said the size of the increase didn’t matter because rate hikes would continue and the major banks were already pricing in higher rates.
“Particularly with the fixed rate loans, they’ve been ramping those up for a period of time already, so in some ways any increase in the cash rate is just catching up to what’s happening in the retail market,” he said.
Economist and former Deloitte Access Economics partner Chris Richardson said wages, prices and interest rates broadly move together but “the trouble is the good news is arriving before the bad,” with cost of living pressures rising and wages still in the slow lane.
“I’d be still hanging out for wages growth to pick up more or in other words, some of the good news to arrive before I ran too hard on the bad news side of this equation,” he said, tipping a 25bp increase.
ANZ shifted its expectations from a 25bp increase to a 40bp jump last week following the release of strong GDP data, which showed the economy expanded by 0.8 per cent in the March quarter.
“We think there is a need to move the cash rate a little higher and faster to slow inflation,” ANZ chief economist Richard Yetsenga said in a note on Monday.
Westpac is also arguing the right move would be for the RBA to lift the cash rate by 40bp to 0.75 per cent.
However, Commonwealth Bank is pricing in a more conservative 25bp lift to take the cash rate to 0.60 per cent, but would “not be surprised” if a 40bp rise is delivered. It expects the cash rate to hit 1.35 per cent by the end of the year.
NAB has also tipped a 25bp lift, saying the RBA’s guidance for rates in May set up a string of “business as usual” 25bp rises and there had been nothing in the data flow for them to deviate from the plan.
“That said, the risk of greater front loading of the hike cycle is clear given upside risks to the inflation outlook and the US Fed, RBNZ and BoC have all moved by 50bp increments recently,” NAB economist Taylor Nugent said in a note on Monday.