Should RBA raise rates again in April?

Oksana Patron

31 March 2023

Despite monthly consumer price index (CPI) having proved to be better than expected, this may be not sufficient for the Reserve Bank of Australia (RBA) to pause the policy rate in April, according to Stephen Miller, an investment strategist at GSFM.

He noted that inflation still remained at elevated levels in an absolute sense and the monthly indicator only abbreviated coverage of the basket of goods measured by the quarterly CPI.

What is more, some of the decline appeared to reflect seasonal factors, with the seasonally adjusted series slowing less sharply to 7.1% from 7.3%.

Miller also stressed that other important data at the very least suggested some caution in asserting that inflation has meaningfully peaked.

“My view remains that the policy rate needs a “4 handle” for the RBA to adequately contain inflation,” he said.

He also pointed to the recent 7% wage increase for workers subject to minimum and award wage arrangements at the Fair Work Commission’s (FWC) annual wage review as “a worrying portent of future inflation”.

“An indication from the Government that it would support an increase in the minimum wage in line with inflation (or something close to it) in its submission to the FWC’s review is also a concern,” he added.

“While well-intentioned, such a move may simply spur inflation pressures as it ripples through the award system and beyond, at a time when productivity has been going backwards.”

On top of that, Australia has underperformed its peers, such as the US, Canada and even New Zealand, on inflation, at least in part because of a less aggressive approach to policy rate increases.

That can be perceived as the RBA exhibits some prevarication in confronting the inflation challenge, according to GSFM.

“As at close of yesterday, Australian money markets are pricing no prospect of an increase in the policy rate in April. Such an outcome is not implausible given the RBA Board’s prior prevarication in aggressively tackling inflation. However, current money market pricing in Australia is at an extreme end of the risk continuum,” Miller said.

“Admittedly, the current upheavals in the banking sector make for fine judgments on future policy rate increases, but like the ECB, which is also arguably behind the inflation curve, and the Fed, the RBA should proceed with a further increase in the policy rate when it meets on 4 April.

“In the past the Governor has mentioned that the path between the vanquishing of inflation and avoiding a recession, or at least a sharp growth slowdown, is a narrow one. Were the RBA to avail itself of a pause in the rate hike cycle, when the data dependence criterion has not been met, the Governor’s path could get even narrower.”