This afternoon, the RBA board will convene to make a decision on the cash rate. While many experts anticipate an increase, there is no consensus on the extent of the potential hike.
Whilst money markets favour a 25 basis point (bp) increase, a market analyst at City Index said “we shouldn’t discount the potential for a 15 bp or even a 50 bp hike”.
“The RBA [is] expected to raise interest rates by 25 bps to 3.35 per cent tomorrow, which would take rates to their highest level since September 2012. If so, it would be their fourth consecutive 25 bp hike and ninth back-to-back hike this cycle, which is their most aggressive in history,” said Matt Simpson.
According to a Reuters poll, 30 out of 31 economists expect a 25 bp hike to 3.35 per cent today, up from 23 out of 27 in January.
Gareth Aird, head of Australian economics at the Commonwealth Bank of Australia (CBA), has raised the possibility of a double interest rate hike. In his latest update, Mr Aird stated that while the bank predicts a 25 bp hike with a 65 per cent probability, there is a “non-trivial” chance that the RBA could increase the cash rate by 40 bps to 3.5 per cent.
However, if a double rate hike occurs at the RBA’s board meeting on Tuesday, Mr Aird said it’s likely that the bank will announce a plan to maintain the policy rate in the future, provided economic conditions align with their updated forecasts.
“We think that the RBA is close to pausing in their tightening cycle,” said Mr Aird.
“Markets should be aware of the risk that the RBA restores the cash rate to a conventional metric in February and announces an intention to pause.”
T. Rowe’s Scott Solomon believes the RBA likely has room for two more interest rate hikes before hitting pause.
“The RBA likely hike at their first meeting in 2023, maybe even once more after that before pausing the seemingly never-ending string of rate hikes,” the associate portfolio manager said.
“What we are confident of is the terminal rate will be much lower than in the US where the Fed will pause somewhere around 5 per cent,” he added.
Similarly, Josh Gilbert, market analyst at eToro, said that while another hike looks set to be delivered, “a pause will be hotly debated”.
“The peak of this cycle is in touching distance,” he added.
Last week, the International Monetary Fund (IMF) suggested that Australia’s macroeconomic policies should continue to tighten in the near term.
“The RBA should continue raising interest rates, with the pace remaining data-dependent. Near-term fiscal restraint will help support monetary policy in holding back excess demand,” it said.
“Near-term fiscal restraint will help support monetary policy in holding back excess demand. Medium-term fiscal policy should ensure credible consolidation amid structural spending pressures, and tax reforms should help mobilise revenues, strengthen economic efficiency, and improve equity.”
The IMF believes that monetary policy will continue to tighten further through mid-2023.
