RBA sees ‘space’ to avoid fourth consecutive rate hike at June meeting

The Reserve Bank of Australia sees room to avoid a fourth consecutive rate hike next month despite inflation rising and economic growth slowing.

Minutes of the RBA’s May meeting were released on Tuesday, where eight of the nine board members backed the hike to 4.25 per cent.

“Members noted that inflation had been well above target in the months prior to the onset of the conflict in the Middle East,” the minutes from the May 4 and 5 said.

“The conflict had, however, resulted in a pronounced effect on the economic outlook.

“Members agreed that monetary policy could not prevent a near-term increase in the price level as higher fuel prices worked their way through to final prices.”

The door has been left open for rates to be held at its board meeting next month, with the soft economic consensus tipping one more rise by November.

Commonwealth Bank now forecasts rates will stay held for the rest of the year, while ANZ tips rates being unchanged “for a prolonged period”.

“Having decided by majority to raise the cash rate target by 25 basis points, members considered what their deliberations implied for upcoming decisions … (they) agreed that the decision would give the board space to see how the conflict in the Middle East develops and Australian households and businesses respond,” the RBA minutes said.

Underlying inflation is “projected to be above target for an extended period across a range of scenarios” for the Iranian conflict and its economic shockwaves, the minutes says.

“Monetary policy could limit the risk that this cost shock resulted in a broader and sustained lift in inflationary pressure … and ensuring medium- to longer term inflation expectations remained anchored.”

Elsewhere on Tuesday, RBA chief economist Sarah Hunter flagged the central bank had a close eye on any cooling in the housing sector after the changes to negative gearing and the capital gains tax discount announced in last week’s federal budget.

“As you can see in our latest forecast, we are expecting the pace of growth and dwelling construction activity to slow over the forecast horizon,” she told a Bloomberg forum in Sydney.

“And that really is consistent with those increases in the cash rate that have come through already.”

The RBA projects headline inflation will ease into the target range by mid-2027, and the less volatile underlying inflation to fall back to the 2-3 per cent target range in mid-2028.

But it’s a forecast with many moving parts.

“This baseline reflects several assumptions,” Dr Hunter said.

“First, the conflict in the Middle East gets resolved soon, causing some fallback in oil prices. Second, domestic capacity pressures in the economy ease.

“This is partly driven by the impact of higher prices on households’ budgets and spending.

“The increase in oil prices has made households poorer in real terms, and we expect this to weigh on household spending.”

She said “significant uncertainties remain”.

“Oil prices could stay elevated for longer than implied by market pricing, and the Iran conflict could lead to broader, more persistent supply disruptions, adding to inflation.”

Global X ETFs strategist, Marc Jocum, says the RBA has been slow to act.

“The RBA is again arriving late to the party, like a pilot announcing turbulence after passengers have already spilt their drinks on board,” he said.

“The RBA no longer needs a telescope to spot the inflation iceberg, as it’s now right in front of them.”

Mr Jocum points to inflation data in February and cost pressures in April as clear evidence the RBA needed to move faster.

“The May minutes from the RBA’s latest monetary policy decision suggest the RBA has finally looked beneath the iceberg surface and realised what households have been warning about for months – inflation pressure is spreading more broadly through the economy,” he said.

The investment strategist says the central bank should have gone harder against inflation in 2022 to avoid the flip-flop hikes this year following cuts in 2025.

“To be fair, central banking is a brutal juggling act, and the impact of the Middle East conflict was a curveball no one saw coming,” Mr Jocum said.

“However, the RBA’s recent choreography raises credibility questions … That kind of stop-start policymaking makes it difficult for households and businesses to trust what comes next.”

The one RBA board member who did not want to hike earlier this month thought there were less capacity pressures than the RBA staff assessed, they were more worried about downside risks to demand, and they were not as worried about the de‑anchoring of inflation expectations.

Commonwealth Bank senior economist Ashwin Clarke said the meeting minutes affirmed the bank’s prediction rates will be held in June so the Australian economy can assess the effects of three hikes and the war.

“Beyond that, we still expect the RBA to remain on hold over the next year, but the risks to the cash rate path are tilted to the upside,” Mr Clarke said.

ANZ’s economists say the minutes support the bank’s view that a June hike is less likely.

“We continue to expect the RBA to leave the cash rate unchanged at 4.35 per cent for a prolonged period,” they say.

“The board thinks that financial conditions are tight but is uncertain on the extent of this and so is in more of a ‘wait and see’ mode with respect to developments, both with domestic activity and the Middle East conflict.”