The AUD/USD pair recovered on Monday, but markets are anxious ahead of the Reserve Bank of Australia’s (RBA) interest rate decision. The RBA could deliver another 0.25% interest rate hike tomorrow Tuesday (6 June, at 04:30 GMT), after recent figures confirmed inflation remained persistently at high levels.
The monthly Consumer Price Index (CPI) figures showed annual inflation rose from 6.3% in March to 6.8% in April.
Australia’s central bank is expected to raise interest rates three more times in coming months to ease surging inflation.
Uncertainty about the RBA’s strategy
According to the Finder RBA Cash Rate survey, 55% of experts anticipate a rate hike tomorrow to bring the official interest rate to 4.1%—the highest rate since 2012. Finder head of consumer research Graham Cooke said that there was growing market uncertainty around the RBA’s strategy. While the RBA board has been criticised for its recent rate hikes, another one maybe needed since inflation remains high and has become more entrenched.
While markets expected the RBA to remain on hold at its May meeting, it surprised markets by delivering a rate hike due to unexpectedly high inflation. So market participants believe that hot inflation will force them to act once again. This view is also supported by Governor Philip Lowe’s hawkish rhetoric who said during his testimony on Wednesday that the RBA will do whatever is necessary to bring inflation down from around 7% to its 2-3% target.
RBA is concerned about hot inflation
The central bank which meets Tuesday to decide on rates is concerned about inflation surging higher, a very tight labour market and house prices recovering fast.
Analysts expect that the RBA will have to raise rates aggressively to return core inflation back to the target, otherwise it may take a very long time for it to come down.
There are many factors that support growth in the economy, with the recovery in house prices, strong business activity and credit expansion, to name a few, and with strong labour force growing, inflation will continue to rise. This is a concern for the RBA.
RBA to remain on hold
According to the Commonwealth Bank of Australia, the RBA will leave the cash rate on hold at 3.85% at the June Board meeting. They believe that the economic data released since the last meeting in May along with the domestic economy showing substantial signs of slowing down don’t support another rate hike in June. They expect the bank to resume increasing the cash rate in July or August after a pause in June if the economic data supports the case.
A Reuters poll of economists has also shown that Australia’s central bank will keep its key interest rate unchanged at 3.85% on Tuesday. Despite the fact that there is little evidence to show that inflation will come down to the RBA’s target range of between 2% and 3% and further expectations of rate hikes, 21 of 32 economists still believe the RBA would hold its official cash rate at 3.85% on 6th of June. Banks such as CBA, NAB and Westpac expect the central bank to pause on Tuesday.
While some expect rates to rise, others anticipate a pause, so there is no clear consensus about where the cash rate would be by the end of the third quarter.
If the inflation data is higher than the RBA’s forecasts, then they will likely hike rates over the next two or three meetings.
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