BENGALURU – The Reserve Bank of Australia will raise interest rates by a more modest 25 basis points for a second straight month on Tuesday and is set to do so again in December despite the highest inflation in three decades, a Reuters poll found.
This puts the RBA – which kicked off its relatively late starting rate-hiking campaign with four straight 50 bp moves – out of step with its global peers, which are mostly still raising rates in larger increments.
Nearly 90 percent of respondents, 28 of 32, in the Oct. 24-27 Reuters poll said the RBA would hike its benchmark cash rate by 25 bps to 2.85 percent at its Nov. 1 meeting. The remaining four forecast a 50 bp rise.
Policymakers surprised economists and markets earlier this month with the smaller 25 bp hike, saying rates had already risen substantially. But with inflation racing to 7.3 percent last quarter, the RBA is under considerable pressure to reconsider.
“In these circumstances, the RBA will need to move monetary policy into more clearly restrictive territory to ensure inflation returns to target,” noted Alan Oster, group chief economist at NAB.
He added that while the strength of inflation meant the board would likely debate the possibility of a 50 bp hike, “we see a 25 bp hike as being slightly more probable given recent communications”.
Among major local banks, ANZ, CBA and NAB expect a 25 bp hike on Tuesday, while Westpac predicted a 50 bp rise.
Bill Evans, Westpac’s chief economist, in a reasearch note called the surge in inflation a “genuine shock” and said that by not responding firmly the central would risk giving the impression it is “less than fully committed to the inflation task”.
One reason for hesitation is the precarious state of Australia’s housing market which is expected to cool rapidly this year and next as rising mortgage rates add to the woes of holders of A$2 trillion ($1.3 trillion) in home loans.
More than 90 percent of poll respondents, 30 of 32, predicted another 25 bp hike at the RBA’s December meeting, with the median forecast showing rates ending the year at 3.10 percent, the highest since 2012.
With inflation not expected to return to the RBA’s target range of 2-3 percent before the first quarter of 2024, economists have brought forward their rate hike expectations.
Just over half, 16 of 31, now expect rates to reach 3.6 percent or higher by end-June 2023, a quarter point higher than predicted in an October poll.
Median forecasts then show rates unchanged until the end of September.
More than 40 percent of economists, 13 of 29, forecast the cash rate to either remain at 3.6 percent or rise by the end of 2023, including five who expected it to climb to 3.85 percent. That is broadly in line with market pricing.
However, with the U.S. Federal Reserve widely seen going for its fourth consecutive 75 bp rate hike on Nov. 2, some analysts think the RBA may have little choice but to revert to 50 bps next week.
“It is hard to see how the RBA can ignore such an outsized miss on inflation,” noted Robert Carnell, regional head of Asia-Pacific research for ING. “This…adds pressure on the RBA to revert to a 50 bp tightening pace.”
($1 = 1.5552 Australian dollars)