RBA waits for signs of falling inflationary pressures

Janus Henderson has said it believed the current Reserve Bank of Australia (RBA) level of 3.85% was the ‘most likely’ peak in the cash rate but also warned that further volatility should be expected.

At the same time, manager stressed that the RBA raised interest rates another 25 basis points (bps), to 3.85% and warned that they are now highly data dependent and they would be no longer committed either way between pausing or hiking, but want to see clear signs that inflationary pressure was abating, particularly in the wages sector.

The firm’s fixed interest strategist – macroeconomics, Emma Lawson, said the approaching end of the RBA’s extraordinary tightening cycle, combined with inconsistent data which would have a stronger impact on some sectors, would continue to drive marker volatility.

“We see the current RBA level of 3.85% as the most likely peak in the cash rate but acknowledge the myriad uncertainties,” she said.

However, she noted, the key swing factor would be the speed of adjustment in the Consumer Price Index (CPI) toward the RBA’s 2-3% target.

“For this reason, we have a solid tilt to the alternative RBA path, of a terminal cash rate of 4.35% by August 2023. We see the mostly likely outcome of the June meeting as a pause in both scenarios,” she said.

According to Janus Henderson, the RBA’s governor was now focused on four main data points which included retail sales, employment, the NAB business survey and CPI, after May readings delivered “mixed reviews”, with the monthly CPI remaining a little higher than expected but still consistent with moderating headline CPI.

Lawson added that although the Federal Budget did not greatly change the growth profile, it included a series of measures that would allow adjust prices over the year, with estimate of CPI hitting 3% in early 2025.

“We currently see market pricing of nearly one further tightening as reasonable, however the easing delayed until nearly October 2024 we would consider as somewhat stretched,” Lawson said.

“We currently see the Australian yield curve as broadly fairly valued. We remain on the lookout for tactical opportunities to add duration on spikes in yields on central bank signalling and data flows.”