Economists are mostly convinced the Reserve Bank of Australia will start lifting the cash rate from this week’s monthly board meeting, unable to ignore the biggest rise in annual inflation in more than 20 years.
Financial markets are fully priced for a 0.15 per cent rise in the cash rate to 0.25 per cent on Tuesday, followed by a series of 0.25 per cent hikes in subsequent months.
If correct, it will be the first move in official interest rates since November 2020 and the first increase since November 2010.
It would also mark the first hike during an election campaign since 2007, a poll former Liberal prime minister John Howard went on to lose after campaigning on lower interest rates under his government.
Prime Minister Scott Morrison is putting on a brave face with his own campaign centring on his government’s economic management, saying he fully expects the independent RBA to do what is right for the economy.
Economists had been expecting the RBA to hold off until the June board meeting to avoid being tangled up in a political stoush and in which time it would have the benefit of seeing how wages growth is performing.
The wage price index for the March quarter is due on May 18, just days out from the May 21 election.
But with annual inflation soaring to 5.1 per cent – and underlying inflation jumping to 3.7 per cent and well above the RBA’s two to three per cent inflation target – many economists believe the central bank cannot wait any longer.
“On seeing that number our thinking is now that it precludes the ‘luxury’ of waiting for the additional information on the labour market and the RBA board will have to act on May 3,” Westpac chief economist Bill Evans said.
The RBA will also release its quarterly statement on monetary policy on Friday, which will provide its view on the risks facing the economy from here, as well as a new set of economic forecasts.
Before then, there will be a deluge of new economic reports to digest, kicking off with CoreLogic’s influential home value index for April.
House price growth has been slowing after last year’s surge with potential home buyers facing stretched affordability, rising fixed-rate mortgages and a tightening in lending criteria.
Before Tuesday’s RBA board meeting, the weekly ANZ-Roy Morgan consumer confidence index is released, which will capture the response to the inflation figures and the prospect of rising interest rates.
Other highlights will be retail sales figures for March on Wednesday, covering a time of rising cost of living pressures, including a spike in petrol prices above $2 a litre.
Meanwhile, Australian shares face a tough start to the week after another steep sell-off on Wall Street on Friday as investors continue to fret over the outlook for US interest rates in the fight against inflation.
Adding to the biggest monthly decline in the technology-heavy Nasdaq composite index since the 2008-2009 global financial crisis was a drop in Amazon shares after posting its first loss since 2015.
The S&P 500 fell 155.57 points or 3.5 per cent to 4131.93, the Dow slumped 939.18 points or 2.8 per cent to 32,977.21 and the Nasdaq tumbled 536.89 points or 4.2 per cent to 12,334.64.
Australian share futures sank 94 points or 1.3 per cent to 7315.
On Friday the Australian benchmark S&P/ASX200 index finished up 78.1 points, or 1.06 per cent to 7435.0.