Central Bank hikes rates in May

Third straight hike: At its May meeting, the Central Bank decided to hike the cash rate from 4.10% to 4.35%, following same-sized hikes in February and March.

Inflation concerns motivates move: The Bank decided to tighten its monetary stance due to elevated inflation in recent months, as well as the risk that conflict in the Middle East could keep price pressures elevated ahead. The Bank commented on “early signs that many firms experiencing cost pressures are looking to increase prices of their goods and services”, pointing to the risk of a broad-based rise in prices due to the conflict.

Further increases are possible ahead: The Bank’s forward guidance was open-ended. Another rate hike is a distinct possibility later this year as the Bank looks to quell inflation.

Panelist insight: On the outlook, Goldman Sachs analysts said: “Looking ahead, we expect the RBA to increase the policy rate once more this tightening cycle to 4.60%. We view this forecast as broadly consistent with the Bank’s macro forecasts for i) trimmed mean inflation to persist materially above target until 2H2027, ii) a large positive output gap (of around 1% of GDP), iii) an unemployment rate tracking materially below the RBA’s NAIRU estimate until 2H2027, iv) financial conditions that now are only a bit restrictive.” ANZ’s Adam Boyton said: “Our expectation remains that the Board will pause in June, with the 5:4 vote in March suggesting a strong preference among some board members for moves in Statement on Monetary Policy (SMP) meetings. By August – in the absence of a rapid resolution to the conflict in the Middle East and a resumption of oil flows – we expect the activity data in Australia to be looking sufficiently soft to keep the RBA on hold. That said, risks would now appear more skewed to a rate hike in August than prior to this meeting given the ongoing focus on capacity pressures.”

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