Weekly Australia & NZ

Click here:[span style="text-decoration:underline;">[span style="font-size:15px;line-height:107%;font-family:'Segoe UI Historic',sans-serif;color:#050505;background:white">With WikiFX behind you for every trade[/span][/span]

We startled most readers last week by predicting a 40 basis point RBA rate hike in June.

Analysts were not expecting a rate hike in May, and those expecting one in June had decided on 15 basis points.

Our call was unexpected.

We had two reasons:

A rise in underlying inflation from 0.9% to 1.2% in the March quarter, and from 2.6% in December to 3.4% annually. Unlike prior minutes where policy considerations were solely focused on the Australian economy, the April minutes placed foreign central banks' actions front and center. Other central banks had begun tightening and were anticipated to do so in 50 basis point increments.

While the expected rise in inflation was certainly enough to justify removing the cash rate from the emergency 0.1 percent setting, the Governor stated in his April Board Statement that “over the coming months additional evidence on inflation and the evolution of labour costs will be available to the Board.”

This advice was reiterated in the April Board minutes just a week ago. This instruction was consistent with the Board's commitment to requiring explicit evidence of rising wage pressures.

We predicted a 0.8ppt increase in annual underlying inflation (from 2.6 percent to 3.4 percent) to justify the rate hike in the March quarter.

Listen carefully when central banks give precise guidance about the upcoming Board meeting.

While we expected the Inflation Report to justify two “normal” rate rises in May and June, the Board's unambiguous commitment to wait until June pointed to a “jumbo” 40 basis point move in June.

The March quarter's underlying inflation rate was 1.4 percent (3.7 percent annual), well above our revised prediction of 1.2 percent (3.4 percent annual).

While annual underlying inflation is expected to rise over the next two quarters, we expect quarterly underlying inflation to peak in March.

We predicted 2% headline inflation, which came in at 2.1 percent, considerably above the market consensus of 1.7 percent.

Seeing that statistic, we think the RBA board will have to act on May 3 instead of waiting for more data on the labor market.

Despite a higher than expected March underlying inflation print, we estimate a 15 basis point move in May to return the cash rate to 25 basis points and restore the possibility of future moves at or near 25 basis points.