Economists accelerate RBA rate timing on inflation fears

The divide between economists and financial markets about the timing of the first Reserve Bank cash rate increase is narrowing, as economists conclude that the global tightening cycle and a rapid economic rebound will force the hands of Martin Place.

A snap survey by The Australian Financial Review of 28 economists showed they have significantly brought forward their guidance on the first cash rate increase by six months to February 2023 after strong inflation data that forced the RBA to signal a possible tightening in late 2023 and upgrade its own CPI projections.

The new RBA guidance represents an acceleration of its previous schedule of “not before 2024”, but is still too dovish for the market’s liking.

At the same time, debt futures markets price in nearly four rate increases to take the cash rate to an implied 0.94 per cent by late 2022, with the first move fully priced in June 2022. Last week, they had priced in a 75 per cent chance of a rate hike as early as February 2022, but the RBA’s patient stance has extinguished the most hawkish bets.

“We expect a faster path to hikes due to a stronger starting point for inflation and greater uncertainty over the persistence of higher global inflation and some upside risk to wages amid higher inflationary expectations,” said Su-Lin Ong, chief economist at RBC Capital Markets, one of the 17 respondents who have altered their predictions.

Ms Ong now sees a rate rise in early 2023, from later that year.

A global debate is raging over whether price increases related to COVID-19 supply chain disruption are temporary, or becoming embedded in both higher actual inflation and inflation expectations.

Earlier on Thursday, Federal Reserve chairman Jerome Powell restated his view that current high inflation was expected to be transitory, though he conceded there were upside risks to his central scenario. Inflation for the last five months has been running at twice the Fed’s 2 per cent target.

Be the first to comment

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.