Cash rate to more than double in June: Westpac

Last week, the Reserve Bank of Australia released the minutes from its May monetary policy meeting, reflecting on the decision-making process behind the 25-bp lift made earlier this month. 

According to Westpac chief economist Bill Evans, the justification for the bank’s continued position of the June predicted party comes from the central bank’s ​​pivot to a broader approach to assessing wage pressures beyond the wage price index (WPI).

Previously, RBA governor Philip Lowe consistently stated that sustained annual wages growth above its 3 per cent target would be required to increase rates. 

“Essentially the board recognises its inflation challenge while indicating that it will not be dependent on the WPI alone as its guide to developments in the labour market,” Mr Evans said.  

In late April, it was reported that inflation surged to 5.1 per cent for the year to March – its highest in 22 years – while underlying inflation hit 3.7 per cent.

Earlier this month, the Australian Bureau of Statistics said that WPI rose by 70 bps over the March quarter, lifting the annual rate to 2.4 per cent. 

The bank’s chief economist also noted that the RBA stated that other central banks across the globe were “moving quickly to a neutral stance of monetary policy”. 

“That is significant given that the governor has repeatedly pointed out that Australia’s inflation challenge is not as severe as in other countries,” Mr Evans said.  

“That observation is not supported by the current forecasts. The RBA expects underlying inflation to reach 4.6 per cent by year’s end whereas the Federal Open Market Committee sees core Personal Consumption Expenditures inflation at 4.1 per cent.”

Mr Evans said that this rise in inflation, coupled with the RBA being “behind the curve” compared to other central banks and emerging indicators of a wage price spiral, would require the board to be “vigilant and proactive”. 

A need that Mr Evans stated is “apparent” in the minutes of the RBA’s board meetings.

“For these reasons we do not see the slightly lower than expected WPI for the March quarter as being a swing factor in its decision on 7 June. We still expect the RBA to raise the cash rate by 40 basis points in 7 June,” Mr Evans said.   

Solidifying this position was the RBA’s consideration of a 40-bp rise earlier this month, which it said “could be made given the upside risks to inflation and the current very low level of interest rates”. 

“The lack of a clear argument against the 40 in May in the minutes and the fact that they refer to the level of rates being ‘very stimulatory’ supports that case,” Mr Evans said. 

However, the perspective of a 40-bp hitch is not universal. 

In its own interpretation of the minutes, ANZ stated that while the Reserve Bank will consider 40 bps, the last WPI data, paired with the current unemployment rate being 3.9 per cent, will not meet Mr Lowe’s threshold to pivot away from a 25-bp lift.

“It is possible that the wage measures in the [ABS] Q1 National Accounts paint a very different picture to that from the first quarter’s WPI,” the bank stated. 

“Or the board could conclude that, given policy is still ‘very stimulatory’, there needs to be a faster move to neutral than can be generated by a 25 bps move.

“In the end, we think the board will settle for 25 bps.”

[Related: RBA considered 40-bp cash rate raise]