Australia’s Rate Outlook in the Air as Inflation Still Untamed

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(Bloomberg) — Economists and financial markets are divided over how the Reserve Bank of Australia will move on Tuesday as persistent price pressures and a recovery in house prices suggest a rate hike may be needed while weak activity and rising unemployment prompt a pause.

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About a third of economists expect the Reserve Bank to raise interest rates to 4.1% on Tuesday, a Bloomberg survey of 25 analysts showed, including rates from Goldman Sachs Group and Royal Bank of Canada. Most, including the Commonwealth Bank of Australia, expect it to stand at 3.85%. Traders price odds between 50 and 50.

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“We consider the meeting to be live now,” said Gareth Aird, head of Australian economics at the CBA, attributing a 70% chance of comment while acknowledging narrowing risks. “The domestic economy is now showing sufficient signs of slowing down.”

The RBA meets ahead of the BoC meeting, a similar economy as this week policy makers were also seen contemplating a rate hike, and a week ahead of the Federal Reserve which looks likely to halt its aggressive tightening cycle. The increase provided by Australia would put it far behind its peers in the Asia-Pacific region, with New Zealand reporting that its rate had peaked while Korea and India held firm.

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Governor Philip Lowe surprised RBA watchers last month when it rose unexpectedly after a pause in April. His rhetoric has also turned increasingly hawkish in recent weeks as he worries about mounting upside risks to both inflation and labor costs.

Lowe reiterated last week that the board will do whatever is necessary to bring consumer price gains back to the RBA’s 2-3% target, from around 7% now, as it tries to keep inflation expectations steady.

The governor’s tough stance came before data showed that consumer price growth accelerated faster than expected in April. Two days later, an Australian industrial relations ruling raised the national minimum wage by 5.75%, a decision that prompted RBC and Nomura Holdings Inc. To predict a wage hike in June.

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“Like its global peers, the RBA is assessing whether policy is sufficiently restrictive to ensure inflation returns to target within a reasonable time frame,” said Su-Lin Ong, chief economist at RBC.

“Domestic consumption and demand are declining,” she said, but the labor market is very tight and wages are rising and these are “more pressing policy considerations.”

Those calling for higher rates also fear that higher inflation expectations will become entrenched if not addressed with urgency given recent global experience. In addition, the recovery of the housing market along with rising rents also threatens to drive up fuel prices.

The RBA’s own forecasts show that inflation has returned to the top of its target in mid-2025.

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Lowe will have a chance to explain his decision and his broader assessment of the economy in a speech Wednesday morning in Sydney. Many economists expect the governor to signal more hikes ahead even if he decides to pause on Tuesday since inflation will remain higher for longer.

Shortly after Lowe’s speech, the Census Bureau is scheduled to release GDP for the first quarter. Economists who favor the pause say policymakers will wait to dig through that data before acting again.

“We think the RBA will want to see actual national accounts data before acting, which rules out June,” said Josh Williamson of Citigroup, predicting consecutive price hikes in July and August.

Another concern is the imminent expiration of a large number of home loans pegged at record low rates during the pandemic. RBA research has shown about 90% of fixed rate mortgages coming up this year will see a payment increase of 30% or more.

Australian households are among the most influential in the developed world, with a debt-to-income ratio of nearly 188%, underscoring the need for the RBA to tread carefully.

“A rate of 4% plus cash would push debt servicing costs into record territory as a share of household income,” said Shane Oliver, chief economist at AMP Capital Markets, which forecasts a rally in June.

— with assistance from Garfield Reynolds and Tomoko Sato.