Rate hike bets surge on central bank’s hawkish comments
Investors are tipping the Federal Reserve to raise interest rates for a second month following hawkish comments from the central bank’s second-in-command.
RBA deputy governor Andrew Hauser struck a pessimistic tone about the impact of the war in Iran on inflation in a podcast interview with The Conversation’s Michelle Grattan.
This has led to a sharp repricing in money markets for the RBA’s next board meeting on March 17.
Before the podcast aired on Tuesday, market pricing implied there was less than a one in three chance that the RBA would raise the cash rate to 4.1 per cent.
It later rose to almost two-thirds.
Mr Hauser’s comments, speaking just before RBA board members entered a pre-meeting media ban period, were seen by some economists as a development that paves the way for a rate hike.
While economists at Bank of America, UBS and Capital Economics put forward their rate hike forecasts for March, TD Securities sees the increase in this period as an equal possibility.
“There is a credible case for a rate hike next week,” said Prashant Newnaha, senior interest rate strategist at TD.
Compared with Governor Michele Bullock’s comments the previous week, Mr. Hauser painted a more dire picture of how conflicts in the Middle East could cause oil prices to rise and cement inflation.
The cost of oil rose from US$118 to US$90 a barrel in one of the most chaotic 24-hour periods witnessed by commodity traders following conflicting comments from US President Donald Trump.
“If we fail to act decisively enough to prevent inflation from remaining high or even rising… that would be bad for everyone and worth constantly reminding ourselves of how toxic inflation is,” Mr. Hauser said.
Alex Joiner, chief economist at IFM Investors, noted a change in tone that suggested the board would be more comfortable raising rates even if it caused unemployment to rise.
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The lieutenant governor noted risks for both sides, including that war in the Middle East would likely lead to higher inflation and put downward pressure on growth.
“I think it will be a very frank discussion,” Mr. Hauser said.
This poses a dilemma for the RBA, which is aware of being caught between the dual tasks of keeping inflation low and targeting full employment.
NAB economists said it was highly uncertain how the conflict would play out, which could be seen as highlighting the need to stand by.
But Mr. Hauser also concluded that the latest data more conclusively confirms that the economy is constrained on the supply side.
“As a result, we view Hauser’s comments as cautioning the market that it should not be surprised if the RBA decides to raise rates next week,” NAB economists said in a research note.
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