MNI RBA WATCH: Hawkish Shift Puts 25bps On Table In March

A hawkish Reserve Bank of Australia sharpened the odds of another 25bp hike in March after warning it expected more tightening was needed, telegraphing its intent to push rates into deeply restrictive territory to rein in inflation that won't return to the upper end of its target until mid-2025.

Fresh from a two-month summer hiatus, the RBA put paid to debate over a potential pause by hiking rates 25bp to 3.35% and stiffening the tone of its concerns about inflation after the Q4 Consumer Price Index - and trimmed mean - printed hotter-than-expected. December's phrasing about the bank not being on a "pre-set course" was abandoned as Governor Philip Lowe warned of possible hikes over the months - plural - ahead, while highlighting the risk that entrenched expectations of high inflation would be "very costly to reduce later".

The statement of intent triggered a repricing of rate expectations. Overnight indexed swaps priced in a rate of 3.53% for the March meeting and a full 25bp hike by the April meeting. A peak rate of around 3.9% is priced in for late 2023. (See AUSSIE BONDS : Bear Flattening After RBA Points To Multiple Hikes) Leading economists expect a 25bp hike in March, with an expected strong print for the Q4 Wage Price Index due Feb 22 viewed as justification for the move. A pause in April is viewed as possible to allow policymakers to assess Q1 CPI due April 26, followed by a hike in May.

The RBA's first forecasts for 2025 showed inflation is expected to remain elevated for a prolonged period. While maintaining its forecast for headline inflation to ease to 4.75% by the end of the year, it flagged a decline to "around" 3% - the top end of its 2-3% target - by mid-2025. More detail will be revealed in Friday's Statement on Monetary Policy, which may deliver an upward revision to the bank's trimmed mean estimate. The RBA maintained its growth forecasts for 2023 and 2024 at around 1.5%.

EYES ON HOUSEHOLDS

Despite delivering cumulative hikes of 325bps since May and pushing rates to their highest level since 2012, the RBA is unsure when the full impact will hit households, which have proved quite resilient to higher rates so far. "There is uncertainty around the timing and extent of the expected slowdown in household spending," Lowe said. While mortgage rates have risen sharply, high savings and a strong jobs market have proved supportive. The bank's head of economic analysis, Marion Kohler, last week warned more than 800,000 loans worth around AUD350 billion would roll over from fixed rates to variable rates this year. (See MNI BRIEF: Wage Hikes To Play Out 'A Bit further'-RBA's Kohler)

The RBA expects the jobs market and wages to remain solid. It left unchanged its forecast for the unemployment rate to edge up to 3.75% by the end of the year, though it is expected to grind higher to 4.5% by mid-2025. The jobless rate was 3.5% in December. The bank, which has warned about the risk of a wage-price spiral, expects a "further pick-up" in wages due to the tight labour market and higher inflation. The re-opening of Australia's borders and fast-tracking of work visas is expected to boost the supply of workers and ease wage pressures. (See MNI POLICY: RBA Inflation Fight Aided By Increased Migration)

Governor Lowe will provide additional insight into the RBA's thinking when he appears before a parliamentary economics committee on Feb 17.