A wealth management firm has suggested an increase in the official interest rate is not inevitable in May, but conceded the Reserve Bank of Australia (RBA) will have to make a close call as to its policy direction.
GSFM investment specialist Stephen Miller recognised the current annual inflation rate of 3.5 per cent is potentially not as bad as it may seem at face value.
“As the NAB economics team note, an outcome around 3.5 per cent suggests that that inflation was both too high and broad-based ahead of the Iran shock, but probably short of fuelling RBA concerns that domestic pressures were accelerating into early 2026,” Miller said.
“Given that the RBA increased the policy rate twice through the March quarter, there is an argument that they have acted ‘pre-emptively’ in confronting the inflation surge that pre-dated the Iran shock.
“That being the case, an outcome around 3.5 per cent might not be sufficient to get the RBA over the line for a May policy rate increase.”
According to Miller, the fact last month’s decision to increase the official interest rate by 25 basis points to bring it to the current level of 4.1 per cent was not unanimous by the RBA board suggests it has bought itself some breathing space in May to take into account more data before meeting again in mid-June to contemplate whether any further monetary policy tightening is needed.
“But it’s a close call,” he admits.
He pointed out other developments are likely to strengthen the argument for a rate rise.
“Going the other way was the recent Fair Work Commission decision to abolish junior pay rates for young workers which are thought to add around 0.4 per cent to wages growth over 2027 and an upcoming minimum wage decision expected around July of this year,” he explained.
“The forgoing is emblematic of a particular inflation proclivity in the Australian economy.
“This is the product of an almost egregious inattention of governments, both state and federal and Labor and coalition, to policies that might ease structural constraints on inflation. In most instances this involves ‘unintended consequences’ of regulatory creep in labour and goods markets.”
He conceded though that although the RBA may put the official interest rate on hold in May, it may still raise it later in the year.