Key points
- Experts believe there is a strong chance the central bank will lift the cash rate again this month.
- While RBA acknowledges that Australians are suffering, bringing inflation under control remains the priority.
- It could take a couple of years to get inflation within the RBA's target band.
Despite easing inflation and hundreds of thousands of Australian families struggling to make ends meet, experts believe there is a strong chance the central bank will lift the cash rate again on Tuesday.
The Reserve Bank of Australia (RBA) has gradually jacked up the cash rate from 0.1 per cent in April 2022 to 3.6 per cent in attempt to return inflation to its target band of 2 to 3 per cent.
and softer than the market expectation of 7.2 per cent.
The lower annual inflation, also known as 'disinflation', has raised hopes for an interest rate pause in April.
But experts now say they're doubtful of a pause.
So what is likely to happen when the RBA board meets today? Will they take into account the number of Australians who are at breaking point? And what can we expect over the coming months?
What's likely to happen today?
Economists seem to think the RBA may raise rates again by another 0.25 per cent on Tuesday to 3.85 per cent, though they expect there won't be many more rate hikes to go.
"The RBA is on a roll so if they're not finished, why pause," Dr Brendan Rynne, chief economist at KMPG Australia, told SBS News.
"We know that inflation is too high, the labour market is still incredibly tight, and we're still getting strong wages growth.
"I would think that the Reserve Bank wants to make absolutely sure that it's got inflation under control. And at the moment, I don't think they can say that."
The fact that the European Central Bank, the US Federal Reserve and the Bank of England have all hiked interest rates in the last two weeks is also an indicator of what may happen here, Dr Rynne added.
"Central banks overseas are still having a dogged fight with inflation and there's nothing to suggest that the inflationary environment in Australia is any different to that. And arguably, they're further along the decline in inflation rates than where we are; we're only just starting."
The RBA has gradually jacked up the cash rate from 0.1 per cent in April 2022 to 3.6 per cent, its highest rate since May 2012. Source: AAP / Mark Baker/AP
"I'm pretty sure there will be at least one more rate increase in the next couple of months. Whether it's this month, I'm less certain of."
Warren Hogan, an economic advisor to Judo Bank, said the resilience in the Australian economy "adds to the case for rate hikes".
"The Australian economy is proving resilient to higher interest rates, much more than what people were thinking.
"I think the RBA will stick to their original plan and get their cash rate up to 3.85 per cent. And then they can pause and feel a little bit more comfortable that our interest rate is an appropriate level to pause," he told SBS News.
"The evidence shows there is real pressure on certain households and businesses. But for the great bulk of the economy, people are still doing ok. I think the RBA is going to have to raise rates a couple more times later in the year."
Will the RBA take the financial suffering of Australians into account?
The short answer is not really.
"They're going to be focused on the wellbeing and the best interests of 26 million Australians, not the hundreds of thousands who may be struggling, particularly those who took out loans when rates were low," Mr Hogan said.
"You could argue that the RBA said they were going to stay low for a while, and they bear some responsibility for that. But to alter their monetary policy now and not do the right thing by the whole country compounds the error."
Dr Rynne added the RBA recognises that many Australians with mortgages "are feeling the pinch".
"But while they recognise there is suffering, that challenge is not in their charter," he said.
"Their charter is to get inflation under control, back to the 2-3 per cent band."
How many more rate rises will be needed to reach that target?
Economists believe it could take a couple of years to get inflation within the RBA's target band.
While the prices of some goods, including fuel, are coming down thanks to the rectification of supply chain challenges experienced during the COVID-19 pandemic, rents and energy prices are still rising while high labour costs are filtering through to the price of services.
At the same time, a tight labour market and potential wage growth would place pressure on inflation upward.
Labour market outcomes have been more solid than anticipated, with the unemployment rate coming down from 3.7 per cent in January to 3.5 per cent in February, reflecting a 16,500 reduction in the number of unemployed and 65,000 new jobs, which is well above the normal monthly average.
Last week the Australian Council of Trade Unions made a submission to the Fair Work Commission calling for a 7 per cent pay rise for the lowest-paid workers to keep pace with inflation.
The prospect of wage growth puts the central bank in a difficult position, Dr Rynne explains.
"The RBA has got this double-edged position of needing to raise rates to help bring aggregate demand down, but not wanting to raise rates that trigger a wage-price spiral," he said.
Mr Hogan said the RBA will be seeking "a very modest, gradual decline in inflation".
"I think it's realistic to reach the target in two or three years' time. And to keep it there over the long term."
