Preview: RBA expected to keep rates at 3.60%

Key dates

The Reserve Bank Board of Australia is scheduled to meet next Tuesday, the 2nd of May at 2.30pm AEST. The interest rate market is confident that the RBA will keep rates on hold in May at 3.60%.

The backdrop

In April, the RBA paused its rate hiking cycle after delivering a cumulative 350 basis points of rate hikes to allow time to assess the impact of tighter monetary policy on the economy during a time of uncertainty.

"The decision to hold interest rates steady this month provides the Board with more time to assess the state of the economy and the outlook, in an environment of considerable uncertainty."

Cash rate target chart

The release of the minutes for the April Board meeting confirmed that the RBA's decision to pause its rate hiking cycle was a close call and that it retains a tightening bias. The Board noted, "on balance, [we] agreed that there was a stronger case to pause at this meeting and reassess the need for further tightening at future meetings."

As part of its assessments in deliberating how much further interest rates need to increase, the Board would be paying close attention to "developments in the global economy, trends in household spending and the outlook for inflation and the labour market."

What is expected?

The Q1 2023 Australian CPI report released this week showed that headline inflation fell to 7%YoY, slightly above the 6.9% expected but well below the 7.8% increase in Q4 2022.

The RBA's preferred measure of inflation, the trimmed mean, slowed to 6.6% YoY, lower than consensus expectations of 6.7%. A combination that indicates inflation peaked at the end of last year, and its momentum is slowing.

Elsewhere, while the labour market remains tight, household spending has slowed in response to the cost-of-living pressures of elevated inflation and higher interest rates.

Following the cooler-than-expected inflation data, the interest rate market, which was 25% priced for a 25bp rate hike, is now showing next to zero probability next week. Looking further along the curve, the interest rate market has above 10bp of rate cuts priced into the curve by year-end.