Commerzbank’s Volkmar Baur notes that there is strong market conviction that the Reserve Bank of Australia (RBA) will implement a third consecutive interest rate hike at its upcoming monetary policy meeting. Futures contracts indicate a 75% probability of a rate increase, and among 28 economists surveyed by Bloomberg, only one expects the policy rate to remain unchanged, with the rest anticipating a 25 basis point hike [1].
The primary driver behind these expectations is persistently high inflation. In March, inflation stood at 4.6%, which, although not rising as sharply as analysts had forecast, remains well above the RBA’s target range of 2-3%. Even when excluding the energy component, inflation would still be significantly above target. Additionally, the Melbourne Institute’s surveys show that inflation expectations have recently climbed to 5.9%, over a percentage point higher than at the start of the year [1].
Recent RBA communications have taken on a more hawkish tone, with speeches since the last rate hike reflecting increased concern about inflation and expectations. However, the article also highlights factors that could lead to a surprise pause, including the impact of prior tightening, softer March data, and a split among board members. The lagged effect of previous rate hikes on the real economy is also noted as a reason for caution [1].
While the market is largely positioned for another hike, the possibility of a pause cannot be ruled out, given the mixed signals from economic data and the RBA board [1].
CONCLUSION
Market participants and economists overwhelmingly expect the RBA to raise rates for a third consecutive time, driven by inflation well above target and rising expectations. However, some uncertainty remains due to recent softer data and internal board divisions, suggesting a pause is not entirely off the table.