What to expect from the RBA meeting in May 2023

Forecasting the next move by the Reserve Bank of Australia (RBA) Board has become increasingly difficult. 

Economists from Australia’s big four banks have not reached consensus on whether the RBA will hike the cash rate in May 2023. While ANZ, NAB and Westpac are all predicting no movement, CBA anticipates a hike of 25 basis points - although the bank’s economic team stressed it’s a line-ball call.

The ABS reported that annual inflation rose during the March quarter 2023, up 7.0%, but the pace at which it is increasing has diminished each month since peaking at 7.8% in December 2022.

Since May 2022, the RBA has hiked the cash rate by 350 basis points to 3.60%. This apparent emergence of disinflation seemed to encourage the Board to pause its rate tightening cycle for the first time in 12 months. 

However, there are many economic factors that affect the RBA’s decision. These range from retail spending, to banking instability, housing affordability and the rental crisis, household savings, wages growth and employment.

Here's a breakdown of what the big four banks expect will happen at the RBA Board's next monetary policy meeting on Tuesday May 2, 2023. Continue reading for further insights and quotes from the bank's leading economists.

RBA

The Reserve Bank of Australia (RBA) Board left the cash rate unchanged at 3.6% in April 2023.

In the minutes from the April meeting the Board observed that, “while inflation in Australia remained too high, the tighter monetary policy stance was gradually flowing through to the real economy.”

However, the Board advocated that the purpose of pausing the cash rate was to allow time to gather more information, adding that monetary policy may need to be tightened at subsequent meetings.

During his speech at the National Press Club earlier this month, RBA governor Philip Lowe warned that supply issues continue to impact inflation. These issues stem from a range of areas within the economy including the housing market, energy sector and productivity performance.

“Our current forecast is that inflation returns to the top of the target range, but only by mid-2025. This forecast takes into account the supply-side considerations I just discussed. It is important to point out, though, that while supply-side factors are influencing how fast inflation declines, they cannot be a reason to tolerate higher inflation on an ongoing basis. Dealing with the supply issues will be harder, not easier, if inflation stays high for too long. The Board is committed to making sure this doesn't happen. The way we will do so is to manage aggregate demand with interest rates.”

ANZ

The bank speculates that the RBA will leave rates on hold in May. ANZ senior economist Adelaide Timbrell expects the cash rate to peak at 3.85% by August 2023 and for the Board to make one 25 basis point cut by November 2024.

“Trimmed mean inflation and the monthly CPI indicator were both lower than expected, supporting our view that the RBA will keep the cash rate at 3.6% in May. Looking further ahead, though, persistently strong services inflation, reflecting excess demand in the economy, suggests that more RBA tightening will be needed in coming months.”

CBA

The only bank forecasting a rise in the cash rate next month. CBA head of Australian economics Gareth Aird projects a 25 basis point jump at next week’s meeting. However, the bank’s economists suggest it will be a very close call (55% in favour of a hike to 45% against).

“We retain our call for the RBA to increase the cash rate by 25 basis points to 3.85% at the May Board meeting, our forecast for the peak in the cash rate. Money markets disagree with our view. As we go to press just 3 basis points are priced for the May Board meeting (i.e. a 12% chance of a 0.25% rate increase). It is not the first time we have gone into a Board meeting with a call not supported by the markets and undoubtedly it won’t be the last.”

NAB

Economists at NAB believe that the cash rate reached its peak at 3.60% in April and expect to see this figure fall to 3.10% by May 2024. NAB Group Economics team reported that the economy continues to evolve in line with near-term forecasts, showing signs that consumption is plateauing ahead of a likely slowdown later in the year.

“We further trimmed our rate expectations in the month, expecting the RBA to remain on hold until mid-2024, before rates are cut back towards neutral. We acknowledge the risk that in the near-term the RBA could well take rates higher if challenged by the incoming CPI data (April) or WPI data (May). However, our view is that the longer the RBA waits, the less likely they are to increase rates further. Regardless, with policy now in restrictive territory, and the RBA placing a strong emphasis on maintaining the gains in the labour market we are in sight of the likely peak.”

Westpac

Another proponent of the peak. Westpac’s forward guidance is that the cash rate will drop to 2.35% by May 2025.

Following the release of the March quarter inflation stats, Westpac doubled down on its April forecast of a pause to the cash rate, suggesting that the RBA would again hold rates steady in May.

“We have always argued that May would likely be the peak of the tightening cycle so we are now lowering our forecast cash rate peak from 3.85% to 3.6%. Given the uncertainty around the current outlook and a need to contain inflation expectations, the Board is almost certain to maintain its clear tightening bias. However, as we move through the remainder of 2023 the credibility of that bias is likely to fade.”

To help you stay up to date with the latest changes to the national cash rate, as well as any adjustments to interest rates for home loans and savings accounts that follow, be sure to visit the RateCity RBA Rate Tracker hub.

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