Thursday 28th April 2022
Analysts tip May rate rise as inflation soars to 21 year high
Several economists are now expecting the central bank will raise interest rates next week given a jump in inflation to a 21-year high of 5.1%, which would be the first rise in interest rates during an election campaign since November 2007, and coming ahead of several forecast rate rises in the second half of 2022.
Official data revealed that the Consumer Price Index (CPI) rose 2.1 per cent in the March 2022 quarter, to be 5.1 per cent higher from a year ago, the largest quarterly and annual rises since the introduction of the goods and services tax (GST) in July 2000, according to data from the Australian Bureau of Statistics (ABS). The jump in inflation was largely due to higher home construction costs and escalating fuel prices.
A core inflation measure, which excludes large price rises and falls, increased to 3.7%, the highest level since March 2009.
More bets rise on May rate rise
Given such rapid inflation, financial markets have priced in a greater chance of an increase in interest rates at the Reserve Bank of Australia’s (RBA) meeting on May 3, and several analysts are now expect the central bank to begin hiking rates next week
“While there are some temporary factors that are leading to a lift in inflation … there has been a cumulative impact on consumer prices from these temporary or short-lived supply issues which are leading to uncomfortably high consumer prices,” said Shane Oliver and Diana Mousina, AMP Investments economists.
“We now expect the RBA to start hiking at its May meeting next week and by 0.4 per cent, which will take the cash rate to 0.5 per cent. The latest inflation blowout adds significant pressure on the RBA to immediately start raising rates and to do so more aggressively than initially thought likely,” they said.
“We expect another 0.25 per cent hike in June and now see the cash rate rising to 1.5 per cent by year end,” they said.
ANZ head of Australian economics David Plank is also forecasting a 0.15 percentage point rate rise on Tuesday next week. “We now expect the RBA to hike by 15 basis points next week …. Inflation pressures have momentum and have broadened. A cash rate target of 0.1 per cent is inappropriate against this backdrop.”
Similarly, Westpac Bank chief economist Bill Evans expects the RBA to lift the cash rate by 15 basis points at its May meeting next week and then by another 25 basis points in June.
Russel Chesler, head of investments and capital markets at VanEck, has also predicted the RBA will raise rates next week. “Inflationary pressures are clearly building and the extensive lockdowns in China are likely to further exacerbate global supply chain bottlenecks, reducing the availability of goods and pushing up prices.
“With such a quick pick up in inflation to 5.1 per cent, which is well above market expectations, there is greater chance that the RBA will increase official interest rates in May even though we are in an election period. If, however, the central bank waits until its June meeting, then I’d expect a bigger increase in rates, most probably 40 basis points,” Mr Chesler said.
However, not all analysts agree a rate rise in coming next week. Economists at the Commonwealth Bank think the RBA is more likely to wait until June 7 to raise rates for confirmation that wages growth has started to lift towards the goal rate of 3 per cent, with the other complication being the timing of the federal election on May 21 and the Wage Price Index being released on May 18. The Commonwealth Bank expects official interest rates to be gradually lifted to 1.25 per cent by March quarter 2023. Either way, fixed home loan rates are rising relatively quickly.
Nicki is an experienced journalist writing across The Inside Investor and The Inside Adviser.
