MNI RBA WATCH: 25bp Hike Expected; Eyes On Revised Forecasts
Elevated inflation is likely to prompt a ninth consecutive rate hike, with 2025 forecasts expected to show a return to the 2-3% target range.
The Reserve Bank of Australia is expected to deliver another 25bp hike on Tuesday, with updated forecasts at the first meeting of the year set to shape market pricing of the peak rate as policymakers confront inflation that remains well above target.
A ninth consecutive hike - and fourth straight 25bp increase - would take rates to 3.35%, the highest since 2012, after a hotter-than-expected Q4 Consumer Price Index was viewed as forcing the central bank's hand to continue the most aggressive tightening cycle since the 1990s. The Q4 trimmed mean, a gauge of underlying inflation, exceeded the RBA's estimate.
It's expected policymakers will canvas a pause, a 25bp hike or a 50bp hike - similarly to their deliberations in December - but settle on 25bp given Q4 headline inflation printed at 7.8% y/y, but the full impact of last year's cumulative 300bp in tightening is yet to be felt. One economist, who correctly forecast October's step down to 25bp from 50bp, sees a "non-trivial risk" of 40bp - and a possible pause - to return rate moves to traditional increments. The need for additional hikes will narrow the RBA’s already "narrow path" in balancing its inflation fight against avoiding recession.
The debate over the number of prospective hikes and timing of a pause has been fuelled over the past two months since the RBA's last meeting by data showing the economy is cooling. December retail sales fell 3.9%, the fourth-largest monthly decline, though strong earnings updates from retailers have cast some doubt over the read. House lending fell for an 11th consecutive month in December as rate hikes raised borrowing costs and squeezed the size of new loans.
Unemployment held steady at 3.5% in December but a decline in jobs suggested the labour market is no longer tightening. However, wages are expected to continue rising, complicating RBA efforts to bring inflation back to its 2-3% target. The RBA's head of economic analysis, Marion Kohler, told a Senate committee on Feb 1 that wage hikes were set to play out "a bit further". (See MNI POLICY: RBA Inflation Fight Aided By Increased Migration)
The Q4 Wage Price Index is due Feb 22, and may prove key in shaping rate expectations for March. Overnight index swaps have priced in another 25bp hike by May, with a peak around 3.6% by mid-2023.
The RBA will also likely consider shifts in other central banks’ thinking. December’s minutes noted that "no other central bank had yet paused". Since then, Norges Bank kept rates steady last month, while the Bank of Canada indicated it was prepared to pause should growth align with its forecasts.
The RBA will provide a taste of its updated forecasts in the meeting statement, ahead of the more detailed release in the Statement on Monetary Policy on Feb 10. The first forecasts for 2025 are expected to show a return to the 2-3% inflation target range.
The RBA had forecast inflation to peak at around 8% in Q4 in November's Statement on Monetary Policy, and Q4’s 7.8% y/y print could deliver a modest downward revision to headline CPI estimates. However, forecasts for the near-term trimmed mean are likely to increase after Q4’s 6.9% y/y, above RBA expectations for 6.5%. Kohler’s comments suggest the Bank may boost some of its Wage Price Index forecasts.
While domestic growth is expected to slow, the RBA will take comfort from the reopening of China's economy and the positive impact on key exports like iron ore and coal. Benchmark iron ore prices have rallied from USD80 a tonne in November to USD125. (See China Related Assets Consolidate - A Bump In The Road Or Something More Threatening?)