(CEP News) Montreal – Economists are unanimous in expecting the Reserve Bank of Australia to hold its key interest rate Tuesday as previous rate hikes and renewed stress in the global credit market begin to show their effects.
A survey of 23 economists polled by Bloomberg expects the bank to hold its key rate at 7.25% after two consecutive 25 basis point rate hikes.
Despite recent data showing inflation pressures remaining strong, it’s important to note that the economy has not yet had time to react to the previous two rate increases, nor the unofficial rate hikes from the country’s largest banks and continued strains in the global credit market, said Joshua Williamson, a senior strategist at TD Securities in Sydney.
“These are significant economic issues and the RBA is likely to see how the economy reacts to these developments before contemplating any policy changes,” Williamson wrote in a note to clients.
However, inflation data in Australia continues to print on the upside. On Monday, the TD Securities–Melbourne Institute Monthly Inflation Gauge was released, showing a 0.4% rise in March following a 0.3% increase in February. In the 12 months to March, the Inflation Gauge rose by 4.0%, following a 4.0% rise for the 12 months to February.
“The RBA will remain concerned with the run of inflation results confirming inflation above its target and showing few if any signs of topping out,” Williamson noted. “That said, the RBA was fully anticipating higher inflation when it hiked official interest rates in February and March and there is no doubt that monetary policy is now restrictive.”
Senior RBC Capital Markets economist Su-Lin Ong agreed that there are finally signs showing that the bank’s “long and drawn out” tightening cycle is finally coming to an end. However, speculation in the market of a possible rate reversal later in the year is “decidedly optimistic,” Ong noted.
“While there are tentative signs that the rate hikes and market-driven increase in key lending rates is finally starting to get some traction, it remains early days,” she wrote in a client note, adding that inflation is likely to remain above the RBA’s target range of 2-3% for the next 18 months.
Partly fuelled by a step-up in global credit turmoil in recent weeks, Ong noted that the local market is now fully priced for a 25bp cut by year end and a further 25bp cut by April next year.
“If rates have indeed already peaked at 7.25%, the odds are that a tightening bias will linger for some time and that rates will remain on hold for a good 12 months, if not longer,” she said.
Economists at Westpac cited a weak round of credit data as suggesting the higher interest rates are finally starting to have an effect. Recent data released by the RBA showed a sharp slowing in business credit growth in February to 0.5% month-over-month from 1.5%. Credit to the private sector rose only 0.7% seasonally adjusted in February, well below the consensus 1.1%. Weakness is also being seen in personal sector credit, which fell 0.1% from January and 10.8% from a year earlier.
“This is a weak set of credit aggregates that adds to recent survey evidence that higher interest rates and market turmoil are now biting, reinforcing our view that the RBA is now on hold, particularly given (that) the data pre-dates the March RBA rate hike and additional independent rate hikes from intermediaries,” they wrote.
