Why some economists go against the flow on RBA rate bet
Near Wynyard station in Sydney there is an underground walkway where pedestrian traffic flows entirely in one direction during peak hours.
Phil O’Donaghoe, Deutsche Bank’s chief Australian economist, says it leaves a strange feeling of discomfort when you find yourself walking against the current.
“I know this is the right path to my meeting, but subconsciously it still feels like I’m going in the wrong direction. It’s a human condition, I guess. Going with the flow can be comforting,” he writes in a research note.
“Deutsche Bank’s base scenario for the RBA’s February meeting now looks a bit like the Wynyard walkway.”
Mr O’Donaghoe is one of a handful of economists who expect the Reserve Bank of Australia’s board to keep the cash rate steady at 3.6 per cent when it wraps up its first meeting of 2026 on Tuesday.
The gist of his heterodox argument is that most analysts have focused on the rise in core inflation in the Australian Bureau of Statistics’ long-running quarterly consumer price index series, the RBA’s preferred measure.
But doing so ignores the downward trend in ABS’s newly printed monthly data series; This suggests that inflationary pressures are temporary rather than permanent; However, the RBA has stated that it will pay less attention to monthly measurements while the glitches in the data are ironed out.
Also swimming against the tide are Andrew Boak of Goldman Sachs and Shane Oliver, chief economist at AMP.
Dr Oliver concedes that all key measures of inflation are well above target and the job market remains tight.
But inflation is expected to slow this year, house price increases slowed in December, consumer spending is likely to fall if the RBA moves from cuts to increases so quickly, and a stronger dollar will help reduce imported inflation.
“Given the cross-currents, and particularly the downward trend in truncated average inflation, the RBA should keep rates steady and probably wait for further information, but that is a close call and not something we have great confidence in,” he said.
“While we put the probability of increase at around 49 percent, we keep it constant at 51 percent.”
Money markets place the likelihood of a rate hike at a much higher level, implying that the likelihood of a 25 basis point increase is around 70 percent.
Economists from JPMorgan, HSBC, RBC Capital Markets, Challenger, Jarden, EY, Deloitte Access Economics, Rabobank and the four major banks also predict an increase.
If they are right, the RBA will be the first major central bank to make a U-turn from interest rate cuts to hikes following the post-Covid inflation surge.
“The economy has improved over the last 12 months and we are now close to Australia’s speed limit for economic growth,” Belinda Allen, Commonwealth Bank’s head of Australian economics, told AAP. he said.
“This continues to put upward pressure on inflation and the RBA needs to take action to bring inflation back towards target.”
While the decision sets the tone for the week, economists will also examine building approvals data on Tuesday and Australia’s trade balance on Thursday.
Federal politicians will grill RBA officials on interest rate decisions on Friday, with governor Michele Bullock, her deputy Andrew Hauser and three deputy governors in the front row at a committee hearing in Canberra.
Meanwhile, Wall Street investors are trying to understand what Donald Trump’s nomination to replace Fed Chairman Jerome Powell will mean for interest rates.
Former Fed Governor Kevin Warsh should support lower rates but also end the more aggressive QE associated with other potential candidates.
U.S. stocks closed lower on Friday, with the S&P 500 losing 30.03 points, or 0.43 percent, to end at 6,938.98 points.
Nasdaq decreased by 223.59 points to 23,461.53 points, and the Dow Jones index decreased by 185.12 points to 48,886.44 points.
Australian stock futures fell 63 points, or 0.71 percent, to 17,958.
The S&P/ASX200 fell 58.4 points on Friday, falling 0.65 percent to 8,869.1 points, while the All Ordinaries lost 72.1 points, or 0.78 percent, to 9,164.8 points.
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