By Shaloo Shrivastava
BENGALURU (Reuters) – Australia’s central bank is expected to go for a final 25 basis point interest rate hike to 3.85% on Tuesday, although forecasts from economists polled by Reuters suggest the decision on whether to hike or hold rates is on a knife edge.
While inflation in Australia rose to a more than three-decade high of 7.8% last quarter, well above the central bank’s target of 2%-3%, the bank signalled again this month a possible end to its current tightening cycle, as it did in December.
A new monthly measure of Australian consumer prices on Wednesday showed inflation slowed to an eight-month low of 6.8% in February from 7.4% the previous month, bolstering the case for a pause in rate hikes.
While the Reserve Bank of Australia (RBA) focuses on the more detailed quarterly inflation data, due on April 26, the slowing monthly inflation numbers suggest the peak may already be in the rear-view mirror.
The latest poll of 27 economists taken March 27-30 showed the RBA would increase its official cash rate by 25 basis points to 3.85% at its April 4 meeting. But the market is pricing in no further hikes from the current rate.
While just over half, 14 of 27, predicted the cash rate to rise, the remaining 13 saw a pause at 3.60%. Some regular contributors could not be reached after the inflation data to confirm their views and so were not included in the poll.
However, eight of the 13 economists expecting a pause pencilled in a rate hike sometime in the second quarter.
“The softer headline inflation print for the month of February will not be sufficient for the RBA to abandon their tightening bias as labour market indicators, forward indicators and the still comparatively high level of inflation all point to the need for further tightening,” wrote Benjamin Picton, senior macro strategist at Rabobank.
Reuters Poll: RBA monetary policy and economy outlook, https://fingfx.thomsonreuters.com/gfx/polling/lbpggjelkpq/Reuters%20Poll%20RBA%20monetary%20policy%20and%20economy%20outlook.png
Among major local banks, ANZ and NAB forecast a hike at the April meeting, with ANZ predicting a higher terminal rate of 4.10%. Although CBA and Westpac forecast a pause in April, they expect one more rate hike in the second quarter.
Forecasters are divided in part because of mixed messages from the central bank, which was late joining the current global tightening cycle, only starting in May 2022, and has been keen since December to end it.
“The RBA’s communication since the beginning of the year has been somewhat erratic,” said Gareth Aird, head of Australian economics at CBA.
“In a short period of time the RBA has both dialled up and subsequently dialled down their rhetoric on just how much more tightening they think they are likely to deliver.”
The RBA has raised rates by 350 basis points, less than some of its peers such as the U.S. Federal Reserve, the Bank of England and its neighbour the Reserve Bank of New Zealand.
Minutes from the March meeting showed RBA board members reconsidered the case for a pause at the following meeting, noting monetary policy was already in restrictive territory and the economic outlook was uncertain.
Although the median forecast showed the cash rate would remain at 3.85% until the end of 2023, five economists predicted it to peak at 4.10%. Two did not expect any change from the current 3.60%, while five expected at least one rate cut by year-end.
Nearly two-thirds, seven of 11, who answered an additional question said the bigger risk to their terminal rate forecast was it would be lower than they predicted, while the remaining four said it would be higher.
Money market traders are pricing in no move through the end of this year.
Inflation was not expected to fall to within the target range until the third quarter of 2024, averaging 5.4% this year and 3.1% in 2024, up from 5.2% and 2.9%, respectively, in a January poll.
(For other stories from the Reuters global long-term economic outlook polls package:)
(Reporting by Shaloo Shrivastava; polling by Madhumita Gokhale and Anant Chandak; Editing by Ross Finley and Mark Potter)
