Overview

• We continue to expect the RBA to raise the cash rate by 25bps in April, though we now see the resulting 3.85% rate as the peak (previously 4.1%). Further out, we continue to see rate cuts in H1 2024 bringing the cash rate back to 3.1% as the economy slows and unemployment rises.
• It has become increasingly clear that interest rates are nearing their peak, and the April meeting is a line-ball decision. The labour market remains very tight, inflation is well above target and the risks on wage growth remain to the upside. However, activity is also slowing as post-COVID momentum fades and the monthly CPI appears to confirm RBA and market expectations that inflation has passed its peak.
• The key question for the RBA Board is whether the current level of interest rates is now sufficiently high to ensure inflation sustainably returns to target in a reasonable time frame. In part, this depends on wage pressures remaining contained and expectations for inflation staying anchored. Based on the RBA’s statements and forecasts, a peak cash rate of 3.6% is unlikely to be seen as sufficiently restrictive by the Board, necessitating one more increase before a pause to assess how the effects of prior monetary policy tightening flow through.
• The risk to our forecast is that the Board chooses to pause in April, as floated in the minutes, if a strong signal is taken from the monthly CPI indicator. Alternatively, rates could still rise to 4.1% if either of the full Q1 CPI or Q1 WPI releases surprise to the upside relative to the RBA’s forecasts. On balance, a 3.85% peak appears more likely. Any early reduction in Australian interest rates, however, seems very unlikely barring a significant shock or deterioration in economic conditions.

For further details, please see the Monetary Policy Update (30 March 2023)