Not all policymakers singing from same song sheet following 25-basis-point hike
The Reserve Bank of Australia (RBA)’s decision to increase the cash rate to 4.1% on Tuesday was far from unanimous, with four out of nine Monetary Policy Board members voting to keep rates unchanged at 3.85%.
It marks a dramatic reversal from February, when all nine Board members voted to increase rates by 25 basis points.
In announcing today’s decision, the Monetary Policy Board drew attention to higher inflation due to “greater capacity pressures”.
“In addition, the conflict in the Middle East has resulted in sharply higher fuel prices, which, if sustained, will add to inflation,” said the Board, adding: “Short-term measures of inflation expectations have already risen. As a result, the Board judged that there is a material risk that inflation will remain above target for longer than previously anticipated.”
But it’s clear that not everyone at the central bank is singing from the same song sheet. This raises even more question marks over where monetary policy is heading next.
The Australian three-year bond yield is trading at a significant premium to the RBA cash rate, even following today’s 25-basis-point hike.
At the time of writing, the yield was 4.5% compared to the official cash rate of 4.1%. This suggests the market is pricing in at least one rate hike – potentially more – this year.
All major banks – Commonwealth Bank, ANZ, NAB and Westpac – anticipate at least one more is in the works in May, which would push the cash rate up to 4.35%.
Yet not all analysts are convinced.
Schroders head of fixed income Kellie Wood called today’s decision “dovish”, stating: “We believe the RBA is done here now compared to what’s priced in markets and will strike an even balance between upside inflation and downside growth risks, keeping policy restrictive for longer.”
While IFM Investors chief economist Alex Joiner still sees another rate hike coming in May, there are a lot of variables at play.
“How events in the Middle East play out in terms of the severity and the duration of the energy price shock will be important, with the Bank noting there’s ‘a wide range of possible scenarios’,” said Joiner. “Future decisions will hinge on these geopolitical developments just as much as domestic inflationary pressures.”
AMP chief economist Shane Oliver said a further rate hike "is highly possible, but the longer the conflict persists the greater the risk that the inflation shock will turn into an output shock as higher fuel prices act as a tax on spending, particularly if fuel shortages in Australia emerge in the next month or so".
He believes the RBA will hold steady in May.
Oliver encouraged the government to lower public spending and "introduce reforms to help boost productivity and hence capacity in the economy" in order help with the inflation fight.
