Upward trend: A security detail stationed in the entrance of the RBA building in Sydney. Australia’s central bank is all but certain to increase interest rates at its meeting today. Some observers point to the risk of a resumption of outsized moves. — Bloomberg
SYDNEY: Australia’s central bank looks certain to increase interest rates at its first meeting of the year, with some observers pointing to the risk of a resumption of outsized moves to counter a surprising surge in inflation.
Most economists and traders see the Reserve Bank of Australia (RBA) lifting its cash rate by a quarter-point today to 3.35%, the highest level since September 2012.
The Commonwealth Bank of Australia (CBA) and Australia and New Zealand Banking Group Ltd. highlight a small probability of a bigger hike, while Bloomberg Economics sees a mini 15-point move and JPMorgan Chase and Co predict a pause.
When it discusses policy settings, the RBA will weigh signs of weaker hiring and household spending against a sharp acceleration in core inflation. In December, the board considered a half-point hike and a pause before deciding to raise by a quarter point, meaning it has looked at alternatives.
“The RBA finds itself in a tight spot, with widespread data now showing the economy is cooling, but core inflation is uncomfortably hot,” said Andrew Ticehurst, macro strategist at Nomura Holdings Inc in Sydney.
“The risk would be for a larger move, rather than no move, in our view.”
Governor Philip Lowe has the rare advantage of having watched the US Federal Reserve’s meeting last week, when it downshifted to a quarter-point hike and signalled some more tightening to come.
That gives the governor a read on the global picture, with his United Kingdom and European counterparts also hiking.
The consensus is that most central banks are approaching their terminal rates.
The RBA is in a similar position to the Bank of Korea, where the economy has started to cool but inflation is failing to follow the script.
That said, the RBA had forecast that the fourth-quarter consumer price index would be the peak.
What they didn’t predict was the underlying strength of inflation, with the key trimmed mean gauge soaring to 6.9% from 6.1% in the third quarter and higher than the RBA’s 6.5% forecast.
Lowe has repeatedly said the bank is “not on a pre-set path” on rates and that it will do “what is necessary” to bring inflation back to its 2% to 3% target.
While the bank will release updated quarterly estimates on Friday and touch on them in today’s statement, its November forecasts only showed inflation returning to target in early 2025.
“The central bank will probably suggest more tightening is needed, but subsequent data should convince it that it’s already done enough to quell inflation,” said economist James McIntyre.
Australia’s broadening price pressures prompted CBA’s Gareth Aird to see a “non-trivial” threat of a 40-point hike today.
ANZ’s Catherine Birch reckons “the risks are a bit more tilted to 50-basis-points” given the inflation reading.
Nomura’s Ticehurst and Birch both expect the RBA to take the cash rate to 3.85% by May, a more aggressive prediction than the consensus of 3.6%.
Aird of the CBA predicted a pause following the February meeting.
Traders boosted their forecast for the terminal RBA rate to about 3.75% yesterday, from about 3.65% last Friday, after robust US jobs data raised expectations for the Fed’s hiking cycle.
The RBA’s rate hikes have driven a downturn in the housing market that’s beginning to weigh on broader activity.
Retail sales fell sharply in December, while data released yesterday showed quarterly volumes also declined, which will likely detract from the gross domestic product.
Employment growth is similarly slowing as business confidence wanes.
Lowe maintains that the RBA can bring the economy in for a soft landing, and the International Monetary Fund agrees there’s a good chance of that.
Indeed, the global backdrop is improving, with Australia’s main trading partner China abandoning its zero-Covid policy and reopening, and inflation in other major economies beginning to cool.
Australian prices remain hot in part because the services industry, which drives the economy, is now rebounding strongly.
The RBA is also grappling with a longer than usual lag in transmission because a substantial number of home loans were fixed when the cash rate was at a record-low 0.1%.
Economists see a pressure point in the economy when roughly A$370bil (US$260bil or RM1.1 trillion) of these loans shift to variable rates this year.
“The second quarter of 2023 is when fixed-rate mortgages start to roll off aggressively,” said James Wilson, a senior fund manager in Melbourne at Jamieson Coote Bonds.
“The RBA will be cognizant of that, so we may see a pause after the March meeting.” — Bloomberg
