Rate Hikes – Only a Matter of Time

The Reserve Bank (RBA) scrapped quantitative easing and left the cash rate unchanged after its Board Meeting yesterday. The next question is, when is a rate-hike expected?

Highlights from the RBA Board Meeting:

• The Reserve Bank (RBA) scrapped quantitative easing and left the cash rate unchanged at 0.10 per cent. These decisions met widely-held expectations.
• The RBA explained the decision to drop the program reflected the progress towards employment and inflation goals, as well as other central banks bringing forward the conclusion of their bond-buying programs.
• The RBA has sharply revised up its inflation forecast and moved its unemployment forecasts lower to sub 4 per cent, laying the groundwork for rate hikes later this year.
• The RBA now expects underlying inflation it to hit 3¼ per cent “over the coming quarters” – notably above its target band. The forecast for 2023 was also revised up. If these forecasts materialise, it is hard to imagine the RBA waiting until 2023 to hike the cash rate.
• But the RBA flagged that “ceasing purchases under the bond purchase program does not imply a near-term increase in interest rates”. This is an important sentence. It suggests a rate hike is not imminent next month or the month after, but the RBA will wish to wait to see more data.
• On the RBA’s fresh forecasts, unemployment will be pushing under full employment. It remains only a matter of time before wage pressures mount and a rate hike is sealed. We expect a rate-hike cycle to start in August with a rate rise of 15 basis points, taking the cash rate to 0.25 per cent. Subsequent hikes will return to 25 basis point intervals.

For more insight, download the 2 February 2022 – Economic Commentary