The RBA is broadly expected to hike rates at the conclusion of its policy-setting meeting on Tuesday. The main issue that could affect the market is what the bank communicates for its outlook. Many economists believe that this will be the last hike for a while, so if the RBA does not open the door for a pause, it could surprise the market.
Inflation has been running above the RBA’s target since the middle of last year, and hasn’t abated despite recent hikes. This puts Australia’s central bank in a difficult position, as it was already dealing with high inflation before the energy supply shock, which is expected to raise consumer prices. However, many economists argue that, with higher rates ahead of the energy crisis, the RBA will be in a better position to hold rates. That seems to be a view that’s shared by the market as futures price in a hold into the summer after the May hike.
What Are the Odds of an RBA Hike?
According to analysts, an RBA rate hike is not a done deal, and the odds vary depending on who you ask. The market is fully pricing in a rate hike, which means that the potential for a surprise is to the downside. Meanwhile, 90% of international economists anticipate a rate hike, with the recurring theme being higher inflation. On the other hand, Australian economists are more sceptical, with just 75% expecting a hike. Major Australian banks are hedging their predictions, with the main theme being that they expect a hike but leave the door open for the RBA to pause.
The RBA has hiked three times in a row this year, and a further hike at the May meeting would completely erase all of last year’s easing. The AUDUSD has responded positively to the tightening and is near 4-year highs going into the meeting. This suggests traders are betting on further hawkishness from the RBA.
Why Would the RBA Pause?
The case for a rate hike is pretty straightforward: High inflation. But this raises the question of why so many domestic economists are unsure the RBA will pull the trigger for a third time. This has to do with the underlying driver of the inflation: Housing. The shelter component accounted for the bulk of the rise in inflation over the past year or so, meaning rising consumer prices are not a broad-based economy issue.
If the RBA were to tighten, it would weigh on the economy, which is facing headwinds from the energy crisis. That might give the RBA a reason to pause for one month to assess the potential impact on the economy. If the economy slows down, then inflation could also be pulled lower.
How Will the Market React to the RBA’s Rate Decision?
Markets are taking a hawkish view going into the RBA rate decision, which means that the potential for a reaction is more heavily weighted to the downside. Governor Michele Bullock has been quite hawkish in her rhetoric over the last couple of weeks, but hasn’t gone so far as to suggest another hike will happen.
It could be that the RBA tries a “hawkish hold”, relying on strong hints of rate hikes and concern over inflation to do the job while holding rates unchanged. This would likely surprise the market and could weigh on the AUDUSD. On the other hand, a hike accompanied by clear indications that the RBA is likely to continue to hike could deliver a hawkish surprise and support the AUDUSD.
