Australia’s Central Bank to Raise Interest Rates in Q4, Defying Expectations
According to a recent poll conducted by Reuters, economists believe that Australia’s central bank, the Reserve Bank of Australia (RBA), will raise interest rates by 25 basis points in the next quarter. This unexpected move comes after the RBA surprised many by keeping rates unchanged for a second consecutive month.
The RBA’s decision to hold rates steady was in line with predictions made through interest rate futures pricing. However, it caught most economists off guard as they had anticipated a hike in response to inflation levels reaching 6 percent, which is double the upper limit of the central bank’s target range.
Despite inflation showing signs of easing and the RBA’s confidence in achieving its inflation objective by the end of 2025, economists are puzzled by the decision to pause on rate hikes. They believe that the central bank is waiting to assess the impact of a tight labor market on inflation before making any further moves.
The majority of economists surveyed expect an interest rate increase of at least 25 basis points to be implemented by the end of the year, with the first hike anticipated in the next quarter. The median projection for the official cash rate stands at 4.35 percent.
This prediction marks a significant shift from the expectations of just a week ago, when nearly 75 percent of economists foresaw rates reaching 4.35 percent or higher in the current quarter. However, recent data suggests that the RBA is now prioritizing a data-dependent approach and is less inclined to front-load tightening measures.
Looking ahead, economists at Morgan Stanley predict a final rate hike in November, reducing their terminal rate forecast from 4.6 percent to 4.35 percent. They acknowledge the potential for an extended period of rate stability but highlight the RBA’s inflation path as a limiting factor.
When considering the upcoming RBA meeting on September 5, most respondents in the survey anticipate the official cash rate to remain at 4.1 percent, with only a minority expecting a 25 basis point increase.
The four major Australian banks, including ANZ, CBA, NAB, and Westpac, unanimously predict a pause in rate hikes during September. Among them, NAB stands alone in expecting further tightening from the central bank.
Based on median forecasts, interest rates are projected to remain steady at 4.35 percent until the end of March, with subsequent rate cuts of 25 basis points expected each quarter thereafter. This would result in rates reaching 3.6 percent by the end of 2024.
In summary, economists believe that the RBA’s next move regarding interest rates is becoming increasingly difficult to predict due to the central bank’s data-dependent approach. Although inflation remains above target, the RBA is carefully assessing the impact of a tight labor market before making any further adjustments. But with expectations shifting rapidly, only time will tell how the central bank will respond to these evolving economic conditions.
