Despite the recent inflation print that was better than expected, there is still a pretty solid expectation that the RBA will hike rates at its policy meeting tomorrow. The market reaction could depend more on what the reserve bank signals for its September meeting. There is growing division of opinion between those who see rates topping out at 4.35% and those expecting at least one more hike.
What are the expectations?
There are different views depending on who’s being polled. The most recent survey of international economists polled by Reuters showed a slim majority expected a rate hike. That majority diminished substantially after inflation numbers came out. But a poll of Australian economists finds that over 70% expect a rate hike at the next meeting. Many Australian economists point to the rising housing prices and tight labor market as reasons for the RBA to push rates higher now.
Though the discrepancy fades a bit when considering the September meeting. Many of the economists who expect the RBA to hold once again, still see a rate hike in September. While some of those who expect a rate hike now, see a pause in September. In other words, the discrepancy isn’t so much about how much rates will rise, but when the hikes will occur.
How could the market react?
As far as the markets are concerned, interest rates suggest that traders are pricing in an 80% chance of a rate hike. That means that if the RBA doesn’t deliver, there could be a significant weakening in the AUD. On the other hand, the consensus seems to be that the rate hike will happen either now or in September. So, if the RBA doesn’t hike, but manages to convey sufficiently strongly and convincingly that a hike is coming in September, the market reaction could be diminished.
The other option is if the RBA hikes but then provides a much more neutral stance than the market expects. That could also weaken the Aussie dollar. The consensus is that the RBA will likely keep its stance, communicating that more hikes might be necessary. The option for a surprise to the upside (aside from the very unlikely chance of a 50bps hike) is if the RBA hikes and signals that a September hike would be very likely.
Other factors that might influence
This is the last meeting under the chairmanship of Philip Lowe. The current Deputy Governor, Michele Bullock, was appointed to replace him starting at the September meeting. Typically, central bank governors are wary about changes just as they are leaving, and this might mean that the RBA is inclined towards leaving the decision for another rate hike to the new Board.
Markets and economists generally seem aligned around the final rate. That is, a little more than 80% of economists and the market seem to expect rates to top out at 4.35% by the end of the year. Only a fifth see the RBA raising beyond that. The conditions in the housing industry seem to be the differentiating factor, as both sides seem to agree that inflation is high but coming down. That means following the RBA meeting, Aussie traders might want to focus more on housing data over the next month.
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- Source: https://www.orbex.com/blog/en/2023/07/rba-still-expected-to-hike-then-what
