CPI to leave cash rate in flat line

Underwhelming inflation figures have tied the Reserve Bank’s hands this Tuesday, and potentially for the remainder of the year, despite the board’s desire to hike the official cash rate.

Tuesday’s consumer price index figures recorded headline inflation at 1.9 per cent, notably short of the RBA’s target band of 2 – 3 per cent. Underlying inflation crept back above 2 per cent but did little to raise long term hopes.

RateCity’s analysis of 23 economic indicators showed the majority of the metrics pointed to rates staying on hold.

RateCity’s spokesperson Sally Tindall said low wages growth, high household debt and rising unemployment were also contributing factors.

“The only metric that pointed to a hike was the Reserve Bank’s own minutes, which recorded an intent to hike rates,” she said.

“What they’re lacking is the economics to do so,” she said.

“It will be interesting to see if predicted tax cuts in the federal budget will help kick start the economy”.  

While the RBA remains beleaguered by rates, banks are starting to hike out of cycle on the back of sustained cost of funding pressures.

Suncorp and ME Bank have raised the majority of their variable rates over the past few weeks specifically citing cost of funding pressures.

Other lenders to hike out of cycle include State Custodians and loans.com.au.

“All eyes are on the three-month Bank Bill Swap Rate (BBSW) – a key cost of funding for Australian banks which has continued to escalate in recent weeks.

“While only a handful of banks have made the decision to pass some of these costs onto customers, we think it’s only a matter of time until other lenders follow suit,” she said.

“Right now, the Royal Commission appears to be keeping some of the major players in check. The question is, how long can they hold out?” she said.

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