By Devayani Sathyan and Sujith Pai
BENGALURU (Reuters) – The Reserve Bank of Australia will deliver a fourth successive quarter-point interest rate hike on Tuesday and is likely to follow up with a fifth in March as it grapples with an unexpected revival in inflation, a Reuters poll found.
Policymakers and analysts had expected price rises to cool toward the end of last year but were caught off guard. Inflation rose from 7.3% to a 33-year high of 7.8% last quarter, more than double its 2-3% target range.
That scuppered any immediate plans to pause what already has been a late-starting and more conservative approach to raising rates compared with its peers. But it has brought forward the expected end, now set at the March meeting and not June.
All but one of 31 economists polled said the RBA would raise its official cash rate by 25 basis points to 3.35% at its meeting on Feb. 7. Only one respondent in the Jan. 27-Feb. 2 survey expected no change.
In a January poll, only 23 of 27 expected a hike this quarter.
Economists have also brought forward, but not changed, their terminal rate forecasts, with a near two-thirds majority, 19 of 30, now expecting the cash rate to peak at 3.60% by end-March and stay there for the remainder of the year.
That is broadly in line with interest rate futures pricing.
But given inflation has not come down as much as the central bank had hoped, it is clear the RBA still has work to do, and the risk remains they do more, not less.
“Australia’s CPI data showed momentum continued to build in domestically driven inflation pressures in Q4. This cements a 25bp cash rate hike in February and supports our view of another 25bp hike in March,” said Catherine Birch, senior economist at ANZ.
“We saw the RBA did start later than other central banks and it also slowed the pace of hikes earlier. So it hasn’t hiked as much as many other central banks, including the Reserve Bank of New Zealand. So, we do think they are going to do more.”
Reuters Poll: RBA monetary policy and inflation outlook https://fingfx.thomsonreuters.com/gfx/polling/gdpzqddymvw/Reuters%20Poll%20RBA%20monetary%20policy%20and%20inflation%20outlook.PNG
The RBA has raised interest rates by a total of 300 basis points, and appears to be proceeding with caution while keeping an eye on a rapidly slowing housing market. The U.S. Federal Reserve and the RBNZ have hiked rates by 450 and 400 basis points respectively in the current hiking cycle.
But one-third of economists polled expected the cash rate to rise above the current predicted peak of 3.60% by mid-year.
“We think the Bank will need to see clearer evidence that inflation is slowing in earnest before it backs off from rate hikes. That evidence will probably only become clear in the Q1 inflation data, due at the end of April,” noted Marcel Thieliant, senior economist at Capital Economics.
“The incoming data do not warrant a pause in the RBA’s tightening cycle and we expect the Bank to lift the cash rate to 3.85% by April. However, with inflation set to come off the boil, we forecast policy easing before the end of the year.”
Inflation was forecast to average 5.2% this year and slip to 2.9% in 2024, while the economy was forecast to grow 1.7% in 2023 and 1.8% next year, according to a separate recent Reuters survey of economists.
(Reporting by Devayani Sathyan and Sujith Pai; Polling by Madhumita Gokhale; Editing by Ross Finley and Bernadette Baum)
