The RBA is widely expected to lift the cash rate to 4.35% with another 25bps hike today. The key rate has already risen by 50bps this year. The hike in February was a unanimous decision (9-0), but the March hike was a line-ball call, with four members shifting their vote to a hold amid the uncertainty caused by the Middle East conflict. While another split vote seems likely, markets are pricing in a high probability (around 75%) of a hike today, and a further increase by year-end. The RBA stands very clearly as the hawkish outlier among its peers. While the Fed, ECB and BoE remain in wait-and-see mode, the RBA views the recent oil price shock as an additional upside risk to already elevated domestic inflationary pressures, largely attributed to excess demand in the economy.
Given the 5-4 vote split in March, Governor Bullock was left with the task of communicating a united message. Her overarching point was that all members were on board with the direction rates were heading, the only sticking point between the hike and hold blocs was the timing. Key judgements on the economy informed by the incoming data were that capacity pressures and labour market tightness had increased. The meeting minutes later confirmed that higher fuel prices were viewed as more of a risk to inflation rather than growth.
For an RBA intent on hiking, developments in the weeks since the March meeting have likely only reinforced its views. While oil prices remain elevated with the Strait of Hormuz closed, the Federal Government's temporary cut to the excise tax from April 1 has contributed to noticeably lower fuel prices at the pump - a support for household spending. Inflation has drifted further above the 2-3% target band, rising from 3.7% to 4.6%yr on a headline basis in March. The trimmed mean - the measure the RBA regards as a better gauge of price pressures - was 0.8% in the March quarter and 3.5% in annual terms. Meanwhile, the labour market continued to perform well with the unemployment rate holding at 4.3% in March, in line with the RBA's forecasts.
Aside from the decision, the key issue is around where the RBA sees policy moving forward. Markets broadly expect a hike today but also sense another hike may come before the tightening cycle pauses. Any signs that either support or counter that assessment will be key. Governor Bullock usually steers clear of providing any guidance at press conferences, so the RBA's updated economic and inflation forecasts in the Statement on Monetary Policy may be left to do the talking.
The previous forecasts from February are long out of date, factoring in a pre-conflict crude oil price in the low US$60s, compared to current levels well above $100. The outlook for headline inflation will rise to account for that from the current forecasts of 3.2% by year-end and 2.7% in 2027. But as a guide for policy, markets will be looking at how that spills over to the trimmed mean inflation forecasts (3.2% in 2026 and 2.7% in 2027), and then to the growth outlook. The RBA had growth slowing to 1.8% this year and 1.6% next year; however, demand destruction from higher inflation and tighter monetary policy risks an even weaker growth trajectory.
