By Gareth Aird, head of Australian economics at CBA:
Key Points:
- The RBA is widely expected to raise the cash rate at the June Board meeting.
- We expect the RBA to increase the cash rate target by a ‘business as usual’ 25bp which would take the cash rate target to 0.6%, but acknowledge there is a risk the RBA opts for a larger 40bp increase.
- We assign a 75% probability to a hike of 25bp and a 25% chance to a 40bp increase (we consider the probability of no change or an increase in the cash rate of something other than 25bp or 40bp to be negligible).
The case for a 25bp hike is a lot stronger than 40bp next week:
The RBA Board meets on Tuesday 7 June. There is universal agreement amongst economists and market participants that the RBA will deliver a rate hike having commenced normalising the cash rate with a 25bp increase in May. As such, the focus for market participants is very much on the size of the expected hike. And the debate is essentially centred on two potential outcomes; a 25bp rate hike or a 40bp increase in the cash rate.
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