VIEW: J.P.Morgan Look For 50bp Hike This Week

J.P.Morgan expect "the RBA to hike the cash rate target and IOER by 50bp at this week’s meeting, taking the target to 1.35%. The minutes and the Governor’s most recent speeches indicate that decisions are currently motivated by the still low level of rates, and reaching a destination of 2.5% “over time”. This suggests that for now, each monthly move in the recalibration of policy is not particularly tethered to the flow of incoming data and so can be quite brisk, until rates get closer to 2%. Recent communications also suggest the board is tossing up between 25bp and 50bp moves, with 75bp off the table for now. Guidance has not exactly been iron-clad in recent years, but for the coming meeting, we see this as credible. The board’s messaging is that nothing about the normalization process is locked in stone, but to the extent this is true, it is stating the obvious and probably is directed at the public, rather than markets. In our view the leadership does have a path/destination in mind for the next six months or so given that inflation is likely to remain strong, and only a very sharp weakening in the activity data would be sufficient to stop this. Last week’s retail and vacancy data were firm and suggest household spending will hold up in the opening leg of the tightening process, despite weaker housing/sentiment. In our view this should be decisive for a 50bp move this week.”