RBA to hike after worrying signs for economy

(Jing Ren – Orbex)

It had seemed that the RBA was almost done with the rate hikes, as several indicators for the economy were looking shaky. Rising unemployment was cited often. Another factor is that a large number of home loans are due for renewal in a few months, which could put increased pressure on Australian homeowners. If higher interest rates persist, or they go up higher, it could substantially increase the mortgage cost for Australians.

Then Q4 CPI figures dropped, showing a surprise increase in prices. This changed the calculus for the central bank and shifted expectations to be in favor of a rate hike at the next meeting. The RBA didn’t have any policy decisions in January, as usual, which means it’s a bit behind compared to all the other major central banks which hiked last week.

What are the expectations?

The latest survey shows that the overwhelming majority of economists are forecasting a 25bps hike when the RBA meets on Tuesday (or late Monday, depending on where you are in the world). The same economists also expect another quarter-point hike at the meeting, and that the RBA will signal that in the monetary policy statement.

Interestingly, Australian economists aren’t as certain as international ones. A survey of just Australian economists agreed that a 25bps hike is the most likely outcome of the next meeting. But there is considerable disagreement on whether the RBA will signal that another rate hike is coming. The option is that Lowe takes a page out of other central banks’ playbooks, and emphasizes that the next rate decision will be “data dependent”.

Australian schedules are different

That runs the risk of being interpreted as dovish, however. That’s because Australia publishes inflation on a quarterly basis, so new inflation data won’t become available between the next two meetings. What will become available are further data points that could point to a weakening economy, such as job numbers and retail sales. If the RBA goes “data dependent”, then the scheduling will imply a trove of data pointing to another rate hike not being advisable.

It should also be noted that before the interest rate decision is the release of Australia’s trade balance, which is expected to report a significant fall in the trade surplus. Of course, this coincides with the period ahead of the lunar new year, in which Chinese firms slow down buying ahead of idling production for a full week. Australia and China have been jointly communicating improved relations, including the potential resumption of coal exports.

Evolution of the AUD/USD

The covid situation in China has naturally affected Australia, and the weakening of Aussie from lower exports is seen as having contributed to higher inflation. If Chinese demand ramps up in the coming months, the currency could continue to appreciate. That might help the RBA control inflation, and make further rate hikes not as necessary. That might explain some of the discrepancies between Australian and international economists.

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