The HSBC expects the Reserve Bank of Australia to begin hiking its cash rate in the third quarter on the back of a significant upside surprise in local inflation and with the sharp rise in US inflation as backdrop.
In a statement on Tuesday, the HSBC predicted the RBA would lag the Fed, and would only gradually lift its cash rate with 50bp hikes in the second half.
The US, however, is expected to see much steeper inclines, with Ryan Wang, HSBC’s US economist, tipping the Fed to hike its policy rate by 150bp in 2022 and by 50bp in 2023, kicking off with a likely 50bp move next month.
In Australia, core inflation lifted to 2.6 per cent, where the RBA had expected 2.25 per cent. The central bank updated its own forecasts significantly, with underlying inflation rising to above the 2-3 per cent target band in the first half of 2022, before falling back to 2.75 per cent by late 2022.
“As we have pointed out previously, in the past, this would have been enough to get the RBA to start lifting its cash rate already. But the RBA’s reaction function has changed,” Paul Bloxham, HSBC’s chief economist for Australia, said.
“After a long period of below target inflation, the RBA seems keen to run the economy ‘hot’ for a while,” Mr Bloxham said.
He believes the RBA is looking to reset CPI inflation and wage expectations, such that wage rises of 3-4 per cent become the ‘norm’, after many years of wages growth averaging 2 per cent.
However, Mr Bloxham flagged considerable uncertainty in the economic figures at present, noting that it has been harder than usual to decipher how much underlying inflationary pressure is actually there.
Equally though, he noted, a cash rate at 0.10 per cent “is very low and a long way from normal”.
“Rate hikes in H2 2022 seem likely, rather than just plausible.”
