RBA Expected to Hike by 25bps

The RBA are expected to rise interest rates by 25 bp to 3.35% tomorrow, which would take rates to their highest level since September 2012. If so, it would be their fourth consecutive 25bp hike and ninth back-to-back hike this cycle – which is their most aggressive in history. Even so, their rates remain well below RBNZ’s 4.25% and Fed’s 4.75%, both of those central bank started hiking considerably sooner than the RBA, and continue to battle high levels of inflation.

Unemployment is 3.5% compared with the RBA’s 3.4% forecast in November, but this is not likely a large enough deviation for it to matter, and employment numbers are robust overall. Wage prices are on target at 3.1% q/q, but inflation is a fly in the ointment for the RBA.

According to a Reuters poll, 30 out of 31 economists expect a 25bp hike to 3.35% tomorrow, up from 23 out of 27 in January. 19 out of 30 see the cash rate peaking at 3.6%, but there is a greater chance of it eventually rising above 4% than the consensus currently estimates. US inflation peaked in July yet the Fed are still hiking, and inflation in Australia has not yet peaked. And whilst China’s reopening has brought with it cheers of a soft landing, it is also inflationary which could see CPI reaming higher and stickier than anticipated later this year. And whilst the employment situation remains robust and inflation remains high, it’s a green light for the RBA to continue hiking.

The Aussie took quite a battering on Thursday and Friday following the Fed’s meeting and strong NFP report, and fell -3.7% from its YTD high by Friday’s close. There’s been a mild attempt move lower today, but we’ve seen the meat of the downside move for now. And with the RBA tipped to hike tomorrow, this leaves the potential for AUD/USD to post a countertrend move ahead of the meeting – with its fate to then be decided by the level of RBA tightening.

A surprise 50bp hike could send AUD/USD happily above 70c, although this is not my base case scenario. But a 25bp hike with hint of more to follow should also support the Aussie and help lift it from its current lows. A 15bp hike could signal we are close to the terminal rate and weigh on the Aussie, and likely lift the ASX 200 back towards its record high.