RBA announces May cash rate

The official cash rate has been increased by 25 bps to 3.85 per cent at the Reserve Bank of Australia’s (RBA) latest monetary policy board meeting.

This marks the 11th hike to the cash rate since the tightening cycle commenced 12 months ago in May 2022.

Markets were split ahead of the board decision, however, three of the big four banks (ANZ, NAB, and Westpac) backed a pause considering recent evidence of sustained disinflation.

Headline inflation rose 1.4 per cent over the March quarter, down from 1.9 per cent in the December quarter — the slowest quarterly growth since December 2021.  

Annualised inflation fell to 7 per cent — 0.8 percentage points lower than the December quarter peak of 7.8 per cent. 

ANZ said the “larger than expected” decline in trimmed mean inflation — down from 6.9 per cent in the December quarter to 6.6 per cent over the 12 months to 31 March 2023 — was enough to support a more dovish stance from the RBA.  

However, while acknowledging it was a “line-ball call”, the Commonwealth Bank projected a 25 bps increase, which it said would lift the cash rate to a terminal rate of 3.85 per cent.  

Westpac’s tone was the most dovish among its peers, claiming a May pause would “mark the peak of the cycle”.

According to Anneke Thompson, chief economist at CreditorWatch, the RBA’s decision to resume its hiking cycle following last month’s pause was influenced by stubbornly high services inflation.

“Last month’s March quarter CPI release provided crucial data for the RBA to assess, and while the overall inflation rate has declined from December peaks, services inflation is still rising and may not have peaked,” she said.

Meanwhile, Scott Solomon, co-portfolio manager of the T. Rowe Price Dynamic Global Bond Strategy, had expected mounting “political pressures,” particularly scrutiny of governor Philip Lowe, to support the case for a pause.

On 20 April, the Albanese government accepted in-principle all 51 recommendations outlined in the newly released An RBA fit for the future report, informed by a review of the RBA. 

Launched in July 2022, the review was designed to ensure Australia’s monetary policy arrangements and the operations of the RBA “continue to support strong macroeconomic outcomes for Australia in a complex and continuously evolving landscape”.

Key changes include a major overhaul of the RBA’s decision-making processes, with a call to establish new, function-based, RBA boards (recommendations 8 and 12).

Specifically, a monetary policy board — responsible for monetary policy decisions and oversight of the RBA’s contribution to financial system stability (except payments system policy) — would operate separately from a new corporate governance board.

But according to Mr Solomon, political pressure would not dissuade the Reserve Bank from actioning future hikes, given key economic indicators continue to justify future tightening.

“If governor Lowe ultimately determines that a rate hike is necessary, there are data points available to support such a decision,” Mr Solomon said.

The RBA’s latest monetary policy board decision also followed news of the collapse of another US bank, with California-based First Republic Bank forcibly closed and subsequently acquired by JPMorgan Chase Bank.

However, following its April board meeting, the RBA said banking system volatility in the United States and Europe had not played into the central bank’s decision to halt its tightening policy.

Chair of the US Federal Reserve Jerome Powell, however, had said banking sector volatility would likely result in tighter credit conditions for households and businesses. 

This, he conceded, could undermine the Fed’s long-term macroeconomic objectives, and would hence require a moderation of the central bank’s tightening bias. 

The Federal Open Market Committee (FOMC) is scheduled to meet later this week to determine its next monetary policy move.