The RBA is set to meet tonight (or tomorrow, depending on where you’re located in the world), and raise rates by another 25bps to 3.60%. That is according to the latest surveys of economists which show near-universal agreement with the hike. Just one economist among the 27 surveyed expected the RBA to raise by 15bps.
The move is seen as a continuation of what happened last time. Towards the end of last year, the expectation was building that the RBA would take a pause if not essentially stop hiking. The risk of liquidity tightness was seen as too great, and it was widely expected that inflation had come under control. Then Q4 CPI figures came out, showing that inflation had gone up well above expectations. That changed the whole outlook for the RBA.
It’s about the expectations
Australia only releases official CPI figures once every quarter, making fine-tuning policy in response to inflation a little bit more difficult. Since there has been no release of new official inflation information since the last quarter, the RBA has to operate on the assumption of higher inflation. That would push the needle into the hiking camp, with the expectation that Lowe will communicate the possibility of further hikes in the future.
The thing is, Q1 CPI figures will come out before the next meeting in late April, meaning that the RBA could have an entirely different set of figures to deal with. So, it’s most likely that Lowe will couch any guidance about future rates by also saying the reserve bank will be paying close attention to the data. If not, it could be interpreted by the market as a sign that the RBA will raise rates, even if inflation comes down a bit at the next data release. That would likely be interpreted as a more hawkish stance.
What does the market think?
The market is already pricing in not just a 25bps hike at the next meeting, but another 25bps after that. Then interest rates are expected to remain at 3.85% for the rest of the year. The view of the money markets coincides with the view of most of the economists surveyed. Even though there is near unanimous agreement for the next meeting, the consensus weakens substantially for the meeting after that. Only a majority still see another hike at the April meeting, with a much larger number of economists forecasting a 15bps hike.
In the meantime, the AUD has been buffeted by changing outlooks about China’s recovery. The initial assessment was that China would have a strong recovery after doing away with its zero-covid policy. But GDP figures made that doubtful. Then PMIs for February were well above expectations, rekindling hopes that China would have a strong rebound. Then the Chinese government announced GDP targets for this year that were below expectations, and weakened commodity prices.
With a strong consensus over what the RBA will do, it’s unlikely the policy decision itself would shake up the markets. But it does set the framework to interpret the data coming out later, which could substantially change the market’s interest rate path expectations. And that could cause some added volatility in the coming days and weeks.