RBA to hold rates steady as inflation eases, but hike seen in Q4

September 04, 2023 (MLN): The Reserve Bank of Australia will keep its key interest rate unchanged at 4.10% on Tuesday as inflation shows signs of easing, according to a Reuters poll of economists who do however largely expect a final hike next quarter.

While consumer inflation slowed to a 17-month low of 4.9% in July, from 5.4% in June, it was well above the central bank's target range of 2-3%, keeping expectations for future rate hikes alive, Reuters reported.

Unlike the past few Reuters polls where respondents have been mostly divided just days before an RBA decision, the latest poll showed them nearly unanimous for no move, but still with a lack of consensus on the level at which rates would peak.

With the recent decline in inflation and a slight rise in unemployment, all but two of 36 economists said the RBA would hold its official cash rate at 4.10% on Sept. 5, in line with interest rate futures pricing.

Two respondents in the Aug 30-Sept 1 poll expected a 25 basis point (bps) hike.

"In August, the RBA saw a credible path to get inflation back to target with rates of 4.10% and when we look at the data flow since then we don't see anything that would have pushed them off that assessment," said Taylor Nugent, economist at NAB.

"There are still risks on the inflation outlook and the data queues through Q3 will show some of that strength in service inflation persisting ... and (we) see them feel the need to tighten monetary policy a little bit further."

Among major local banks, ANZ, CBA, and Westpac expected rates to remain unchanged until at least end-2023, while NAB predicted one more rate hike to 4.35% in November.

Slightly less than two-thirds of respondents, 21 of 35, said rates would reach 4.35% or higher by the year. Those results are similar to an August poll, which had a slightly smaller sample.

The remaining 14 forecasts the cash rate to stay at 4.10%.

Of the 21 economists who are expecting at least one more rate hike, two are expecting a move on Tuesday, while the rest are expecting it to come next quarter, likely after the next detailed quarterly inflation data is released in November.

Three economists expected two more 25 bps hikes in the fourth quarter. While BlackRock and Deutsche Bank expected hikes in November and December, Citi expected moves in October and November.

A decision to hike in November would be Michele Bullock's first potential increase after taking over as governor in mid-September.

Median forecasts showed rates will then stay at 4.35% through the end of March 2024.

"We think they'll maintain the tightening bias and there may be further risk of a rate hike later in the year," said Benjamin Picton, senior strategist at Rabobank.

"We're seeing house prices going up again and we're seeing the currency pretty weak recently. So there's justification for the RBA to tweak it a little bit higher."

The Australian housing market, which has rebounded faster than expected due to a lack of supply, will further add to inflationary pressures.

Average home prices were forecast to rise 4.4% this year, an upgrade compared to stagnation predicted in June, a separate Reuters poll showed.

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