Interest rate hike predicted for May, signaling confidence in the economy

The Reserve Bank of Australia (RBA) is closely monitoring the quarterly consumer price index (CPI) results to inform its interest rate decision for next month. The RBA is hoping to see evidence that inflation has reached its peak, even though it remains above the target. Last year, the RBA raised the cash rate four times, by 3.5 percentage points, in response to rising inflation.

Economists anticipate slower price increases for items like food, clothing, housing, computers, and petrol, potentially slowing overall CPI growth. However, bringing core CPI, the RBA's preferred measure, back to the target rate could still prove challenging. Meanwhile, bond markets suggest the RBA might raise the cash rate in May.

In April, the RBA considered an 11th consecutive interest rate increase due to concerns about population growth and public sector wage increases fueling further above-target inflation. However, the need to assess the impact of its tightening cycle on borrowers led to the decision to keep rates on hold. Economists remain uncertain about the March quarter CPI result, as factors like electricity prices and childcare costs remain unknown.

Goldman Sachs suggests potential surprises in financial services and healthcare, which are not included in monthly CPI figures. CBA predicts a 1.3% increase in core CPI for the quarter, taking the annual figure to 7%. If the outcome aligns with or exceeds their forecast for underlying CPI, the bank anticipates the RBA raising the cash rate at the May board meeting. While ANZ expects the cash rate to remain at 3.6% next month as inflation falls more rapidly than RBA forecasts.

ANZ believes that the risk of a surprise is greater later this year, with persistent stickiness in the Q2 CPI report, due in late July, potentially prompting a final 25 basis point hike from the RBA in August. In the meantime, Senior Economist at ANZ, expects the cash rate to remain at 3.6% in May, as inflation appears to be falling faster than the RBA's forecast. The RBA's projections, published in February, anticipate annual CPI at 6.7% and core CPI at 6.2% by June.