Economists widely anticipate the Reserve Bank of Australia (RBA) will raise the official cash rate to 4.6% at its May meeting, marking the 13th increase since May 2022. This move comes as inflation remains stubbornly high, with the March quarter consumer price index (CPI) coming in at 3.6% annually, exceeding the RBA's target range of 2-3%.
Inflation Pressures Persist
The RBA's preferred measure of underlying inflation, the trimmed mean, also remained elevated at 4% annually, well above the target. Services inflation, in particular, has proven sticky, driven by rising costs in rents, insurance, and utilities. The labour market remains tight, with the unemployment rate at 3.9%, adding to wage pressures.
Market Expectations
Financial markets have priced in a 70% probability of a 25-basis-point hike. If realised, this would bring the cash rate to its highest level since December 2011. Some economists, however, argue that the RBA might pause to assess the lagged effects of previous increases, given signs of slowing consumer spending and a cooling housing market.
Impact on Borrowers
For a typical variable-rate mortgage holder with a $600,000 loan, an additional 0.25% increase would add roughly $100 to monthly repayments, bringing the total increase since May 2022 to around $1,200 per month. This has raised concerns about mortgage stress, particularly as household savings buffers have dwindled.
Outlook
While some analysts believe this may be the final hike in the cycle, others warn that if inflation does not moderate, further increases could follow. The RBA's updated economic forecasts, due to be released alongside the decision, will be closely scrutinised for clues on the future path of interest rates.
Governor Michele Bullock has reiterated the board's commitment to returning inflation to target within a reasonable timeframe, but acknowledged the delicate balancing act between curbing inflation and avoiding a sharp economic downturn. The decision is expected at 2:30 PM AEST on Tuesday.
