Latest 13-year high inflation data has put the strongest pressure yet on the Reserve Bank to raise rates, with the question now whether to increase by 15 bps or 40 bps in the first hit.
Underlying inflation hit its highest level since 2009, with home prices recording their highest rise since the introduction of the GST in latest Australian Bureau of Statistics figures out Wednesday.
The Consumer Price Index rose 5.1 per cent in the year to March, after a 2.1 per cent jump in the March quarter.
”The most significant price rises were new dwelling purchase by owner-occupiers (+5.7 per cent) and automotive fuel (+11 per cent),” ABS said.
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“New dwelling prices have recorded their largest rise since September 2000, following the introduction of the GST,” ABS said.
“Price rises were driven by high levels of building construction activity combined with ongoing shortages of materials and labour.”
“Fewer payments of government construction grants compared to the previous quarter also contributed to the rise. These grants have the effect of reducing out of pocket expenses for new dwelling purchases.”
NAB Group Economics has come out strongly off the back of the inflation release, now expecting the RBA Board to bring forward its first rate increase to May.
“On the back of today’s very strong Q1 CPI data, NAB now expects the RBA will raise the cash rate target by 15 bps at next week’s May Board meeting. Further 25bp increases in June, July, August, and November will take the cash rate target to 1.25 per cent by year’s end.”
It said the headline CPI year on year of 5.1 per cent (2.1 per cent q-o-q) exceeded NAB’s expectations and was well above RBA’s most recent February forecasts.
“We continue to see three further cash rate increases in 2023 and two in 2024, taking the target to around 2.5 per cent. We expect the RBA to also confirm that it will not reinvest maturing bonds at the May meeting.”
CBA Economics believes there’s a real risk of rates rising Tuesday, but expects the RBA Board to hold off until June when it would become a question of how much to raise rates by – not whether to do so.
“The inflation data means there is a clear risk the RBA lifts the cash rate at the May Board meeting next week,” a CBA Economics statement said. “But we take the RBA’s April Board Minutes at face value and expect the RBA to wait for ‘additional evidence on the evolution of labour costs’ before concluding that inflation is ‘sustainably within the target range’.”
CBA Economics retained their expectation of a rate hike come June, with the board to move towards that bias next week at the May meeting.
“If the RBA is on hold in May, as we expect, the decision at the June Board meeting will largely be around whether to raise the cash rate by 15 bps to 0.25 per cent or increase it by 40 bps to 0.50 per cent. Valid arguments can be made for both options and it looks to be a coin toss at this stage which way the RBA will go.”
The Reserve Bank of Australia board is due to hold its May monetary policy meeting on Tuesday.
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