Reserve Bank meetings always see a lot of speculation about the cash rate decision and since both the stronger quarterly inflation reading and the solid jobs data in December, there’s been an upturn in forecasts for a rate rise larger than 0.25% to emerge from the bank’s monetary policy meeting today.
The quarter of a per cent is still the preferred forecast by the market but the Commonwealth Bank has speculated it could be 0.40%, as has AMP Chief Economist Shane Oliver, who also thinks there’s a small chance the RBA could even go back to a half a per cent increase.
According to Bloomberg, Andrew Ticehurst, macro strategist at Nomura Holdings, believes investors should be prepared for a larger rise rather than any dovish pivot today.
“The RBA finds itself in a tight spot, with widespread data now showing the economy is cooling, but core inflation is uncomfortably hot,” he said (according to Bloomberg). “The risk would be for a larger move, rather than no move, in our view.”
But fund manager Janus Henderson economists believes a quarter of a per cent rate will emerge from today’s meeting
“Our base case cash rate view remains unchanged and has the RBA lifting the cash rate by 0.25% and then pausing to monitor the path of demand.”
“Provided demand responds to earlier tightening, we look for a late tightening cycle 0.25% “inflation insurance” move in May. This would take the cash rate to a moderately restrictive 3.60%, making the current tightening cycle the largest and fastest in the monetary policy inflation targeting era,” the Janus Henderson economists said.
Futures markets reckon there’s a 25% chance of a rate rise larger than 0.25% which means the overwhelming majority of forecasts see another quarter of a per cent lift in the cash rate to 3.6%.
December saw the cash rate lifted to 3.10%. 3.35% will be the highest it has been since September 2012 which was in the wake of the floods and storms of 2011, the explosion in commodity prices and the rapid expansion of resource investment which then started slowing.
Inflation remains the key and the RBA remains concerned, but perhaps with fingers crossed that the cost pressures have peaked.
The most recent comment from the RBA came from two senior officials in the bank’s economic analysis department who told a Senate cost of living inquiry in late January:
“We are currently revising our forecasts and will publish these at the end of next week, so we are not in a position to preview them yet. What we can say is that we think the peak in inflation was at the end of 2022 – at around 8 per cent – and that inflation will begin to ease over the course of this year.”
If that belief is still held (and the comments were at the end of the week the December Consumer price Index rise was revealed), then the bank will lift rates 0.25%.
Undoubtedly, the first serious rattling of consumer activity appeared in the December monthly retail figures with that fall of 3.9% which some economists described as ’noise’ and a result of the pull forward of Christmas purchases into the Black Friday promotions in mid to late November.
That might have been the case but other data showed a sharp fall in spending on goods and a rise in spending on services, and solid price rises for the latter (such as retailing).
Australian Bureau of Statistics (ABS) data for the December quarter’s retail sales volumes supported the idea that rising prices for goods and services were starting to force households to cut spending.
The ABS said retail sales volumes fell 0.2% in the December quarter, sharply down on the 0.3% rise in the three months to September.
The increase in the September quarter volumes was revised up to 0.3% from the previously reported 0.2% rise, a sign of more underlying strength in demand from households than first estimated.
ABS head of retail statistics, Ben Dorber said: “Retail sales volumes fell for the first time since the September quarter 2021, with volumes falling across all non-food industries as consumers tightened discretionary spending in response to mounting cost of living pressures.”
“Retail prices remain high, but price growth slowed to 1.1 per cent in December due to flat food retailing prices and additional discounting during Black Friday sales. This was the smallest rise in retail prices for 2022.”
The CPI for the December quarter grew more than retail prices, reflecting the stronger price growth in services seen in the quarter.
Retail volumes were still up 1.8% in the year to December, sharply down on the 10% rise in the year to September and much slower than the 7.5% rise in the unadjusted value of sales in the three months to December 31.
