Summary:
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All four major Australian banks now expect a 25bp RBA rate hike next Tuesday, following a stronger-than-expected Q4 inflation outcome.
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The shift contrasts with Goldman Sachs and Deutsche Bank, which continue to call for a hold.
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The debate centres on whether the 0.9% q/q rise in trimmed mean inflation is sufficient to justify near-term tightening.
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Markets see the decision as finely balanced, with the RBA having a history of surprising expectations.
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A hike would make the RBA the first non-Japan G10 central bank to raise rates in the current global easing cycle.
Expectations for a near-term rate hike from the Reserve Bank of Australia have firmed sharply, with all four of the country’s major banks now forecasting a 25 basis point increase at next Tuesday’s policy meeting, following an upside surprise in inflation data last quarter.
The shift among domestic banks highlights growing confidence that inflation pressures remain sufficiently persistent to warrant further tightening. The December-quarter CPI showed trimmed mean inflation rising 0.9% quarter-on-quarter, lifting the annual pace to levels still well above the RBA’s target band. That outcome has pushed markets and local economists to reassess the central bank’s easing bias.
Not all institutions are convinced. Goldman Sachs and Deutsche Bank remain among the minority calling for policy to remain on hold. Goldman Sachs chief economist Andrew Boak said the latest inflation print was not large enough to justify a rapid shift from an easing stance to an outright rate hike within just three months.
Boak described the February decision as a “very close call”, while noting the RBA has, on several occasions, shown a willingness to surprise market expectations when inflation risks are judged to be rising.
The stakes are elevated. If the RBA does proceed with a hike next week, it would become the first non-Japan G10 central bank to raise interest rates during the current global easing cycle. Such a move would mark a clear divergence from peers, many of which are either cutting rates or signalling patience amid cooling inflation.
For markets, the implications are significant. A hike would likely reinforce recent Australian dollar strength, push front-end bond yields higher and force a repricing of the domestic rate path. Conversely, a hold could trigger a sharp unwind in tightening expectations, particularly given how fully markets have moved toward pricing a February hike.
With opinion divided and inflation data still sending mixed signals, the RBA faces one of its most finely balanced decisions in years.
This article was written by Eamonn Sheridan at investinglive.com.