Reserve Bank interest rate: Millions of Aussies hold their breath ahead of major cash rate call

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Household borrowers are set to be spared from further pain at the Reserve Bank's May meeting, yet all eyes will be on governor Michele Bullock's post-meeting press conference for clues on the path ahead for interest rates.

On Tuesday, the RBA is widely anticipated to keep the cash rate steady at a 12-year high of 4.35 per cent, continuing its holding pattern as it awaits further evidence that its efforts to tame inflation, currently at 3.6 per cent, are easing as intended.

Prior to the decision, markets predicted just a 10 per cent chance that the RBA would deliver a shock rate hike, however traders have bolstered their bets of another tightening by Christmas with a 44 per cent chance of a hike by December.

Economists are noticeably less pessimistic about the path of interest rates, with consensus forecasts showing the RBA's next move will be down from November at the earliest.

Household borrowers are set to be spared from further pain at the Reserve Bank's May meeting, yet all eyes will be on governor Michele Bullock's post-meeting press conference for clues on the path ahead for interest rates

Prior to the decision, markets ascribed just a 10 per cent chance that the RBA would deliver a shock rate hike, however traders have bolstered their bets of a resumption in tightening by Christmas, assigning a 44 per cent chance of a hike by December

AMP chief economist Shane Oliver said while he expected the RBA to ultimately keep the cash rate on hold, it would likely warn that a further rise in rates 'cannot be ruled out'.

'As a result, the RBA is likely to consider another rate hike,' Dr Oliver said.

'However, with retail sales and household spending data indicating the consumer remains under pressure and that rate hikes are continuing to work to cool demand ... [the RBA is] likely to sit tight.'

AMP's economists do not expect a 25 basis point rate cut until the RBA's final meeting of the year, scheduled for December.

However, Capital Economics' Singaporean-based analyst Abhijit Surya, one of the few economists who expects the RBA to inflict a 25 basis point hike on Tuesday, said stubborn inflation and the red hot jobs market would force governor Bullock's hand.

'Most of the data released over the past few weeks suggest that capacity pressures in the economy are stronger than the RBA had thought,' Mr Surya said.

'Given the RBA's ostensible resolve to return inflation to target within a reasonable time frame, it can ill afford to look past the upside surprises in the latest CPI and labour market data.'

If passed through by the banks, an increase to the cash rate would hike monthly repayments on a $500,000 variable rate mortgage by an additional $74, after already suffering an increase of $1210 since May 2022.

While not predicting any additional rate hikes, RBC Capital Markets chief economist Su-Lin Ong said she anticipated the RBA would jettison its previous staff forecasts, with the updated predictions showing inflation only scraping inside the 2 to 3 per cent target band by the end of 2025 

While not predicting any additional rate hikes, RBC Capital Markets chief economist Su-Lin Ong said she anticipated the RBA would jettison its previous staff forecasts, with the updated predictions showing inflation only scraping inside the 2 to 3 per cent target band by the end of 2025.

'The forecasts encapsulate the risks and will be consistent with a very mild tightening bias in our view with a labour market that remains beyond full employment and inflation above target and making slower progress,' she said.

Ms Ong added that the RBA would need to see several more months of softer inflation and jobs figures before it contemplated a shift in its interest rate outlook.

'Any change in policy is unlikely for at least 3 months and probably closer to 6 months,' she said.

'An RBA that emphasises patience, downplays recent inflation and labour market data preferring to await more data could temper the more hawkish forecast changes and rate hike discussion.'