By Devayani Sathyan
BENGALURU (Reuters) – Australia’s central bank will raise the cash rate by another half-point on Tuesday to curb soaring inflation but will moderate the pace of hikes for the remainder of the year, a Reuters poll of economists found.
The Reserve Bank of Australia (RBA), one of the later entrants to the global monetary policy-tightening cycle, has raised rates by a total of 175 basis points since May to 1.85%.
With inflation last recorded at a two-decade high of 6.1% and still rising, the RBA will have little choice but to follow its peers and hike rates further.
Twenty-seven of 29 economists in the Aug. 26 – Sept. 1 Reuters poll forecast the RBA would hike the cash rate by 50 basis points at its Sept. 6 meeting, taking rates to 2.35%, more than three times higher than before the COVID-19 pandemic.
All four major local banks – ANZ, Westpac, CBA and NAB – were among those expecting a 50 basis point hike on Tuesday. The remaining two expected a 40 basis point move.
If the majority view is realised, it would be the fourth consecutive half-point rate hike in the current cycle, marking the most aggressive monetary policy tightening since the central bank introduced the cash rate in 1990.
Yet despite its late start, the economists expected the RBA to opt for smaller moves as soon as next month as rates approach the neutral level that is neither stimulative nor restrictive, estimated by the RBA at 2.50%.
“All of the inflation indicators are telling you inflation pressures are still building, and interest rates are still well below where the RBA thinks neutral is. Given that, I think they will do 50 basis points,” said David Plank, head of Australian economics at ANZ.
“But after next week’s move and when they get to 2.35%, assuming they go 50, I think the choices for October and November will become 25 or 50. We don’t think they’re going to drop to 25, but there is a chance they might.”
Most respondents who answered an additional question predicted the central bank would revert to 25 basis point increments at the October and November meetings.
Economists have brought forward their rate hike expectations for the eighth Reuters poll in a row, with just over half, or 15 of 29, now expecting the cash rate to reach 3.10% or higher by the end of this year, broadly in line with market pricing.
The remaining 14 respondents forecast rates to end 2022 at 3.00% or lower. According to the median forecast, rates were then expected to remain at 3.10% until the end of next year.
However, with inflation more than double the top end of the RBA’s 2-3% target range and expected to remain high through next year, some economists expect the half-point rate rises to continue.
More than one-third of respondents, 10 of 29, predicted rates would reach 3.35% or higher by the end of March.
“From here, we expect the RBA to move to a steadily restrictive policy setting, but think it might slow the pace of hikes once it reaches a roughly neutral setting next week,” said Andrew Ticehurst, economist at Nomura.
“I would concede that with Fed and other central bank officials giving hawkish communication, the risk around our forecast likely tilts to the upside, i.e., a higher cash rate or more aggressive moves than we are forecasting.”
(Reporting by Devayani Sathyan; Polling by Anant Chandak and Mumal Rathore; Editing by Ross Finley, Kirsten Donovan)
