Market Wire: RBA hikes again
As widely expected, the RBA raised rates by 25bps at today’s meeting. This is the 9th straight meeting where the RBA has lifted the cash rate, taking it up to 3.35%, the highest since September 2012. Today’s move cements this as the fastest RBA tightening cycle since at least the mid-1990s, and we think there is still a little more work to do. We expect the RBA to hike rates by another 25bps in March, and the RBA’s guidance suggests another move is probable after that. The RBA reiterated that “further increases” in rates “will be needed over the months ahead to ensure that inflation returns to target”. In our judgement, the cash rate should peak at ~3.85%.
Notably, the RBA continues to stress that the “priority is to return inflation to target”, and it is striving to do this while keeping the economy on an “even keel”. This is a tricky narrow path to navigate. The risks of a misstep increase with every rate rise, in our view, given policy settings are in “restrictive territory”. This points to further AUD and Australian interest rate volatility over coming months as these macro tensions play out.
To combat rampant inflation central banks like the RBA have acted aggressively over the past year. The rapid policy tightening is aimed at slowing demand to give supply time to catch up. Will it work? Time will tell, but there are signs on the growth-front the rapid-fire RBA tightening is starting to gain traction across the Australian economy. Interest rate sensitive areas like housing have turned down (prices are falling, turnover has slowed, and the pulse of new lending has weakened), consumer and business sentiment is below average, and retail spending is softening. It is important to remember that monetary policy changes operate with a lag. The full economic effects from the RBA’s cumulative actions should broaden in time, in our view, given the substantial cashflow impact on indebted households, as the large pool of COVID-era fixed rate loans are refinanced over the next year, the spillovers from housing, and below average global growth. After expanding rapidly last year, the RBA is forecasting Australian growth to decelerate to a sub-trend 1.5% pace over 2023 and 2024.
In terms of inflation, the very high Q4 2022 CPI reading (7.8%pa on a headline basis) appears set to be the ‘peak’, and a relative slowdown should unfold from here. This is the view of the RBA, and we tend to agree. The RBA is forecasting inflation to decline to 4.75% this year, and down to ~3% by mid-2025. A range of forward-looking inflation indicators contained in business surveys have stepped down, supply-chains are improving, and global growth is slowing. This mix should be a disinflationary force on goods prices. Global dynamics have been a major driver behind Australia’s inflation surge. At the same time, while wage growth has picked up Australia hasn’t experienced the same sharp acceleration as the US. And in our opinion, labour market pressures look to be turning. Jobs ads and hiring intentions are off their highs, and we believe the reopening of international borders and bounce back in labour supply should help alleviate acute shortages. Indeed, the RBA is anticipating unemployment to edge up to ~4.5% by mid-2025 as activity slows.
The “hawkish” tinges in the RBA post meeting statement are likely to solidify market expectations for another rate hike in March, and one more move beyond that, in our view, providing some short-term support for the AUD. But we don’t foresee terminal/peak pricing lifting much beyond our 3.85% projection. FX is a relative price. Tweaks on the RBA side of the ledger have been more than counteracted by the shift in thinking about how high US interest rates could go following the strong US labour market report. And we believe the market hasn’t moved far enough when it comes to how long the very high interest rates may need to stay in place in the US. Our view is that relative interest rate differentials look set to remain in the US’ favour, generating headwinds and limiting the AUD’s rebound.
Currency Strategist - APAC