Inflation fears set to upend swap traders betting on RBA pause

MELBOURNE: Traders expecting Australia’s central bank to stop raising interest rates next month and then cut them in July may end up being disappointed.

Swaps covering the Reserve Bank of Australia’s (RBA) July meeting now signal about a 50% chance of a rate cut, an about-face from two weeks ago when they were still expecting another hike by then.

The nation’s three-year bond yield has tumbled to more than 70 basis points below the RBA’s benchmark, the most in a decade, on bets that rates will be lower by the time the securities mature.

Bets on easing have accelerated as turmoil in the banking sectors in the United States and Europe fuelled speculation that central banks will call a halt to their hiking cycles to bolster financial stability.

US Federal Reserve (Fed) chairman Jerome Powell said last week the policy committee considered a pause due to the banking turmoil before tightening again to tackle inflation.

“Markets, at least in the context of Australia, have gotten carried away in their push for easing,” said Philip McNicholas, Asia sovereign strategist at Robeco Group in Singapore.

“Given the limited direct spillovers to Aussie banks and the RBA’s singular focus on inflation targeting, it seems hard to extrapolate that they too will take such an aggressive turn in policy rhetoric.”

Australia’s inflation rate probably held above 7% for a fourth consecutive month in February from a year earlier, according to a Bloomberg survey of economists before the data is published tomorrow. That compares with an average rate of just 1.7% in the five years through the end of 2021.

RBA governor Philip Lowe has flagged the importance of this week’s consumer price index print, saying the board will look at four pieces of data, including the February inflation and retail-sales numbers, before deciding whether or not to stop tightening.

The Fed, meanwhile, pushed ahead with its ninth straight rate increase last week, shrugging off concerns that the collapse of lenders such as Silicon Valley Bank and Credit Suisse Group AG would endanger the global economic outlook.

“If the Fed had gone on hold, I think absolutely you could make a case for the RBA doing it,” said Kerry Craig, a global market strategist at JPMorgan Asset Management in Melbourne.

However, inflation data is unlikely to be materially weak, a slowdown in growth isn’t pointing to a recession, and the housing market looks to be stabilising, so “it’s difficult for the RBA to pause in that environment,” he added.

The increasing uncertainty confronting the RBA can be seen in how it has shifted its forward guidance from dovish to hawkish and then back to dovish again within the past three meetings.

Taking everything into account, it probably won’t take much of an upside surprise in this week’s inflation numbers for the it to decide one more hike may be the right thing to do. — Bloomberg

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