Melbourne Institute expects RBA to increase rates in May, but believes it should consider holding

The Melbourne Institute of Applied Economic and Social Research expects the Reserve Bank of Australia Monetary Policy Board will increase interest rates by another 25 basis points next week, marking the third increase this year.

A further increase would bring the cash rate to 4.35%.

However, the Melbourne Institute believes the Board should consider keeping rates unchanged until there is clearer evidence on how previous rate rises and conflict in the Middle East are affecting domestic economic conditions.

Associate Professor Sam Tsiaplias said the Board may choose to act quickly if it is concerned that inflation expectations could become entrenched.

“If the RBA Board believes there is a risk that high inflation expectations will persist, alongside elevated underlying inflation, it is likely to act sooner rather than later and raise rates next week.”

He said the timing of the May meeting may also matter, as it coincides with the release of the quarterly Statement on Monetary Policy, giving the Board an opportunity to explain its decision alongside an updated assessment of economic conditions and the outlook.

At the same time, he said there is a strong case for caution.

“The Melbourne Institute believes the effects of both previous rate increases and global political instability have not yet been fully felt in Australia, so it may be prudent to adopt a wait-and-see approach.”

Supporting this view, the Westpac–Melbourne Institute Consumer Sentiment survey recorded a sharp fall in sentiment in April, likely reflecting ongoing economic uncertainty and cost-of-living pressures.

“Australians are likely to tighten their budgets if they expect further price increases in essentials such as fuel and groceries. If broader spending slows, there may be less need for further rate rises to curb inflation.”

Associate Professor Sam Tsiaplias is available for interview.

Media enquiries:

Serena Doyle | +61 401 153 280 | serena.doyle@unimelb.edu.au

Ben Cardwell | +61 425 665 165 | ben.cardwell@unimelb.edu.au