With the Reserve Bank of Australia (RBA) bringing to a halt its bond purchase programme, economists now expect it to start raising rates by the end of this year.
At its monetary policy meeting on Tuesday (1 February), the bank announced the ending of its AUD4bn ($2.84bn) a week bond purchases scheme, in other words its quantitative easing programme, while leaving the key interest rate unchanged. Typically, the ending of QE is a strong signal to the central bank raising interest rates.
The RBA said that the decision to end the bond purchase programme came after a review of actions of other central banks, the functioning of Australia’s bond market and the progress towards the goals of full employment and inflation consistent with targets.
Despite the outbreak of the Omicron variant of Covid-19, the RBA acknowledged that the labour market has recovered sharply and inflation has picked up quicker than it had expected, even though it remains lower than in other countries.
The central bank also predicts that inflation will increase in the coming quarters to 3.25% before declining to 2.75% over 2023, prompting economists to predict that a rate hike might come as soon as August 2022, as compared to earlier predictions of early 2023.
RBA governor Philip Lowe is scheduled to address the National Press Club on Wednesday and Capital Economics’ senior Australia & New Zealand economist Marcel Thieliant said that the speech will shed light on whether the bank believes wages growth still needs to hit 3% before the rate hike.
August rate hike on the cards
“We only expect that [wage growth] threshold to be reached towards the end of the year, but suspect that the RBA will move a bit earlier and have pencilled in the first rate hike for August, with rates ending 2023 at 1.25%,” Thieliant wrote in a note.
Australian bank Westpac also expects the RBA to start hiking interest rates in August. “We remain comfortable with our August call for the first move. Predictably, the Governor has attributed the wages story as the key for the RBA concluding that their revised forecasts (which are consistent with higher rates) are still uncertain and more evidence is required before it can act,” said Bill Evans, chief economist at Westpac, in a note.
Similarly, ANZ Research also expects the RBA to start raising rates this year, although a month later than the predictions from Capital Economics and Westpac.
Quick hikes expected
“We expect the RBA to start lifting the cash rate in September; for the cash rate to lift to 0.75% by November 2022 and then reach 2% by the end of 2023; and for the cash rate to continue rising in 2024, but at a slower pace,” said David Plank, senior economist at ANZ Research.
“With policy extremely stimulatory, we think the RBA’s initial moves will be quite quick, especially when we consider that the effective cash rate will initially rise by less than the target,” he added.
Following the RBA’s decision, the AUD or the Aussie made handsome gains against the US dollar. At end of day in Sydney, the AUD was 0.29% higher at 70.87 US cents.
“We think that today’s post-RBA price action clearly indicates that rate differentials have remained a secondary driver for AUD/USD, unable to drive a significant divergence from the general USD/risk environment at the moment,” said Francesco Pesole, FX strategist at ING, in a note.
“Periods of USD long trimming (such as what we saw yesterday) should still see AUD emerge as an outperformer due to its still extensive net-short positioning, but we think the very USD-supportive Fed stance on tightening will prevent a significant rebalancing in USD positioning for most of 2022. A recovery in risk sentiment can help AUD regain some more ground, but we think that any recovery in AUD/USD should stall around the 0.71/0.72 area,” he added.