Next step after forecast rates hike an unknown path
Expectations for the Central Bank to increase interest rates at the first meeting of the year are high, but what it will do next is much less clear.
While the central bank’s board was engrossed in deliberations in its temporary digs near Martin Place, bond traders were pricing in a more than three-in-four chance of a 25 basis point rise.
Fresh data last week showed the three-month adjusted average, the Federal Reserve’s preferred measure of inflation, was at 3.4 percent; This is well above the central bank’s 2.5 percent target point.
JP Morgan economists Ben Jarman, Tom Kennedy and Tom Ryan said that while they had previously opened the door to an interest rate increase with hawkish comments in December, it is now more difficult not to go through this rate increase.
While most economists agree that a rate hike on Tuesday is inevitable, they do not share the market’s belief that the Central Bank will raise rates again before the end of 2026.
“We see no case for further tightening beyond February at this stage unless RBA staff forecasts change significantly,” Mr Jarman, Mr Kennedy and Mr Ryan said.
Belinda Allen, Commonwealth Bank’s head of economics for Australia, agrees.
“We think the RBA will be one and done on rate hikes in 2026,” he told AAP.
“Inflation is very high, the economy is growing slightly above its potential, but it will not take much time to bring the economy and inflation back into balance.
“The risk, of course, is that more needs to be done.
“Much of this will depend on the performance of the labor market and the path of future inflation pressures.”
Simultaneously with the interest rate decision, the Central Bank will publish updated staff economic forecasts.
The Monetary Policy Statement will provide plenty of clues as to how the bank thinks next year will go.
“It’s important to watch these figures because it will also give us a clue as to what the RBA thinks it might have to do in terms of interest rates,” Ms Allen said.
In their last economic forecast in November, Central Bank staff predicted that inflation would remain above 2.5 percent at least until the end of 2027.
However, this was based on market forecasts of interest rates at the time, which assumed that the cash rate would remain at its current level.
Although inflation has since exceeded expectations, the cash rate assumption that Central Bank staff will use to model their forecasts will now be significantly higher.
ANZ Bank’s head of Australian economies, Adam Boyton, said this, along with a stronger Australian dollar which hit a three-year high above $71c last week and taking some heat off the economy, would allow them to forecast inflation would return to target.
“We expect (Governor Michele) Bullock to emphasize that the board is not committed to a specific path for the cash rate and that the rate increase in February is not necessarily the beginning of a series of rate hikes,” he said.
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