Australia prepares to extend rate-hike pause as inflation calms

Most economists expect the Reserve Bank to keep its cash rate at 3.6% for the second month in a row money market Shows pricing. Deutsche Bank AG and Westpac Banking Corp were among those who held off on hike calls after falling under first-quarter core inflation forecasts. The Commonwealth Bank of Australia is sticking to its forecast of a quarter-percentage-point move.

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“We think the bar is high for resuming hikes and expect the central bank to remain on an extended pause,” Bank of America Corp’s Izumi Devallier said in a research note.

“The RBA’s preference for a soft landing is meant to reduce the risk of a crash in growth and labor markets, making underlying inflation slower to come down.”

Australia is one of several countries in the Asia-Pacific, including South Korea and India, that have opted to stand pat. The region is likely to benefit from a re-opened Chinese economy which is expected to boost global growth in the times to come.

In contrast, both the Federal Reserve and the European Central Bank are expected to raise rates even higher this week. The Fed announces its decision on May 3 and the ECB a day later.

A key reason for the divergence is Governor Philip Lowe’s willingness to freeze job gains made during the pandemic. Unlike many developed world counterparts, Lowe is willing to tolerate a “slight return” of inflation to the RBA’s 2-3% target in order to deliver a soft landing for the economy.

What Bloomberg Economics Says…

“The RBA will probably maintain a strong accommodative bias to keep inflation expectations under pressure. But our base case is that the bias will not translate into more hikes. In fact, forces are in motion that would indicate a policy reversal soon. “

– James McIntyre, economist

The RBA says monetary policy in Australia is already restrictive, allowing it to monitor a decline from its 3.5 basis point rate hike from May 2022. Its strictness scale is around 4.75 in America and 5 in New Zealand.

Australia’s economy has so far absorbed the rate hike well, hiring continues and unemployment is at an almost 50-year low. Still-strong job vacancies suggest the labor market will remain tight for some time yet.

Monday’s data showed job vacancies declined slightly in April but remained high, indicating unmet labor demand.

Business surveys point to ongoing resilience in the corporate sector consumer spending – a major pillar of the economy – also remains. This is likely to be confirmed by signs that the property market has already found a floor. Monday’s data showed home prices in Australia rose for the second month in a row in April, prompting economists from the ANZ Bank to the CBA to upgrade their forecasts.

For Lowe, these are positive results; For some economists, they are forcing borrowing costs to continue rising.

“Every central bank wants to be able to stop tightening policy, but it’s still a bit premature to call for an outright peak for the RBA rate,” Katie Dean, head of fixed income at AustralianSuper, told PTI. Risk of seeing breakout in salary.

“I don’t think market pricing, which is basically for the RBA to be on hold for a fairly extended period of time, is likely,” she said.

And there are other arguments to tighten.

Australia is experiencing a boom in population growth, currently at around 2% compared to the pre-pandemic average of 1.5%. This is already driving demand for housing, goods and services.

The minutes of the RBA’s April meeting indicated that “the sudden increase in population growth may be somewhat inflationary.”

On Tuesday the board will be presented with the RBA staff’s quarterly update of economic forecasts, which are unlikely to show an early return of inflation to the target, especially if policy remains unchanged for the duration.

Current projections see headline inflation only reaching the top of the RBA’s target in mid-2025.

While the updated data and commentary will be published in full in the statement on monetary policy on Friday, Lowe is likely to expand on the bank’s thinking in an evening speech in Perth following Tuesday’s board meeting.

“Any change to the RBA’s inflation profile will not strengthen the case for raising the cash rate,” said Gareth Aird, CBA’s head of Australia economics.

“It’s a very close call,” he said of May’s decision.

The text of this story is published from a wire agency feed without any modification.