RBA to raise rates a modest 25 bps in June, some call for 40 bps

A Reuters poll of economists found that the Reserve Bank of Australia will raise rates by a modest 25 basis points for a second straight meeting in June, still opting to move more slowly than most of its peers in a campaign to bring down soaring inflation.

''With the economy recovering smartly from the pandemic and inflation at a 20-year high of 5.1%, well above a 2-3% target range, the Reserve Bank of Australia has only recently changed its tune on the need to raise interest rates. 

The median forecast in the May 26-June 2 Reuters poll of 35 economists showed the RBA will lift its official cash rate by another 25 basis points to 0.60% from the current 0.35% at its June 7 meeting.''

''Nearly two-thirds of respondents, 22 of 35, forecast rates at 0.60%, while 11 predicted a 40 basis point increase to 0.75%, where rates were before the pandemic. Only one expected a 50 basis point hike to 0.85% and one other expected no move.''

Analysts at Westpac explained next week’s June Board meeting is fully priced for a 25bp rate hike and almost a 50% chance of a 40bps rate hike. ''The AU-US 10 year bond spread remains just above +50bp.  which we think is a medium-term attractive level but until the RBA is further down its tightening path, it is likely to struggle to narrow.''

''Given the trade-off between hawkish policy and a front-loaded hike cycle focused on inflation risks, versus risks to the medium-term growth profile, we also favour further curve flattening in coming weeks.''