SYDNEY: Australia’s central bank is poised to raise interest rates for a fifth time this year, intensifying efforts to gain control over inflation that’s among the strongest in the developed world.
Most economists expect the Reserve Bank of Australia’s (RBA) nine-member board will increase the cash rate by a quarter-percentage point to 4.85%, an 18-year high.
Money markets are pricing about an 80% chance of a hike when the decision is released at 2.30pm.
It will be accompanied by updated economic forecasts and followed by governor Michele Bullock’s press conference an hour later.
“Inflation is well above target, it has surprised higher and there are no clear signs that it’s easing,” AMP Ltd economists Diana Mousina and My Bui wrote.
“If the RBA doesn’t raise rates, then their credibility could take a hit and embed higher inflation expectations further.”
Australia is caught between twin inflationary forces of domestic capacity constraints and a global energy shock.
A hike would make the RBA an outlier among peers after the Federal Reserve, European Central Bank and Bank of Japan all opted to keep borrowing costs unchanged in recent days.
Across the Tasman, New Zealand also surprised with a pause last week.
In contrast, the RBA is set to extend the most aggressive tightening campaign in the developed world as officials fret that inflation expectations may be starting to untether. Bullock in September pointed to an emerging view among businesses that inflation won’t come back below 3%.
Her deputy, Andrew Hauser, last month refined that assessment, saying a growing share of firms think 3% to 3.5% inflation is “a new normal”, a scenario he called “the central bank’s nightmare”.
The RBA has a 2% to 3% inflation target and the current prolonged run above the top of the band threatens to erode the central bank’s hard-won credibility.
Australia is one of the most vulnerable economies to a global fuel shock as the world’s largest seaborne diesel importer, and has been hard hit since the United States-Israeli attack on Iran.
That compounded existing inflationary pressures from capacity constraints at home, where productivity remains moribund. Bloomberg economist James McIntyre said rising energy prices are crystallising the upside risks to the RBA’s inflation outlook.
“The further escalation is likely to push firms to pass higher input costs on to consumers in coming months.”
Given the RBA can do little to directly address either source of inflation, it’s having to squeeze households to prevent them adding to price pressures. While the central bank has a dual mandate of full employment and price stability, policymakers are prioritising inflation. — Bloomberg
