RBA expected to leave rates on hold for June: Westpac

Both Westpac and AMP expect the Reserve Bank of Australia to leave rates on hold next month after April Labour Force data showed a decline of 18,600 in employment. In seasonally adjusted terms, the unemployment rate increased 0.2 per cent to 4.5 per cent.

Westpac economists noted that this was the highest reading since late 2021 and represented an abrupt halt to the uptrend that commenced earlier this year.

"Some of the surprise can be explained by abnormal seasonality around Easter and noise in youth outcomes, but genuine weakness is also evident just as the shocks associated with the Middle East conflict and 2026’s rate increases reverberate through the wider economy," said Westpac head of international economics Elliot Clarke.

Westpac said the labour data figures will give the RBA "cause to pause in June".

However, the bank expects the RBA could still raise the cash rate in August and September, given their desire to keep inflation expectations anchored.

"The cash rate is then likely to remain on hold until 2028, when a return to near target inflation will allow a reversal of this year’s rate hikes," the bank said.

AMP agreed that while the RBA now has space to wait and see what happens in the economy, the bank remains hawkish.

AMP chief economist Dr Shane Oliver said the minutes from the last meeting noted that financial conditions are now slightly restrictive and that the three hikes this year give the RBA space to see how the Middle East War develops and impacts the economy.

"Soft jobs data for April – the last to be released before the RBA meeting next month – adds to the likelihood that the RBA will leave rates on hold in June. But the overall message from the RBA remains somewhat hawkish," he said.

This was highlighted in comments by RBA assistant governor Sarah Hunter, who noted that a combination of factors meant that the boost to inflation from the oil supply shock could be “faster and more extensive”, Oliver said.

"The RBA is right to be concerned about a flow on to inflation expectations because five of the six years up until this year will have seen inflation above the 2-3 per cent target, which risks increasing scepticism that the target will be met going forward which in turn risks a step up in wage demands and price rises."

Oliver said that Australia sticks out like a sore thumb compared with the UK and Canadian inflation data released in the past week, in both headline and underlying inflation.

"As a result, the RBA has had to hike rates this year when other central banks have held and has to continue to remain relatively hawkish. Unfortunately, the budget did not make the RBA’s job any easier."