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OCR Ship Stays The Course

OCR Ship Stays The Course

Business expectations around inflation were not as bad as the Reserve Bank had thought, but the keel remains set, writes Kris Pedersen.

By: Kris Pedersen

3 June 2024

As expected, the official cash rate stayed at 5.50 per cent when the Reserve Bank completed its latest review on May 22.

We have just ticked over the 12-month mark since the last increase. There was brief concern about the chance of a hike on the back of worse than expected domestic inflation numbers followed by worse than expected job losses.

But a survey showed business expectations around inflation were not as bad as the Reserve Bank had thought. This last point is positive news because it means businesses are less likely to feel they must continually hike their prices to keep up. Wage growth is getting more under control.

One point of concern at the latest review is that the Reserve Bank put a 60 per cent chance of a further hike before the end of the year. While the labour market is improving in regard to inflation there are still other factors such as higher rents, insurance costs and council rates, which are keeping domestic inflation high.

The Markets

Markets had already been pricing in rate cuts prior to the end of the year, so only time will show whether the Reserve Bank is jawboning to keep the pressure on in their efforts to get inflation down or whether they are seriously considering another rise.

The Reserve Bank kept rates too low for too long and the very real risk is that they repeat the mistake this time but keep them too high.

The country is already in a “double-dip” recession and as there tends to be an 18 to 24-month gap between the decision around an OCR review and its flow-on effects, there is a concern they will wait too long before providing relief.

It’s worth noting we are not likely to hear too much from the Reserve Bank on what they intend to do with interest rates until August.

The Data

While the next review is on July 10, at this stage it’s almost certain the bank will keep the cash rate as it is because they will want to see the next inflation data, which doesn’t appear until July 17.

This will reflect how the June quarter ended and how many more jobs have been lost in the same quarter, which they will find out with updated numbers due on August 7.

The OCR review due the following week, on August 24, will give the clearest indication on the possibility of seeing rate drops this year.