Hawkish RBA Shapes as Global Outlier With Third Hike Priced In

2ydjw[qi4pxitk(4nf0[aqvy_media_dl_1.png Bloomberg

Article content

(Bloomberg) — Australia’s central bank is set to entrench its status as a hawkish outlier with a third straight interest-rate hike, diverging from peers that are mainly sitting tight to observe fallout from the US-Iran conflict.

Article content

Economists overwhelmingly expect the Reserve Bank will raise the cash rate to 4.35% on Tuesday, unwinding all of last year’s cuts. Money market pricing for tightening also stands at about 80% after first-quarter inflation held well above the top of the 2-3% target band, driven in part by fuel costs from Middle East supply disruptions. 

Article content

Article content

Article content

While the central banks typically aim to look through temporary supply shocks, ignoring the spillovers from the Iran war is proving harder for the RBA given price pressures were already bubbling and are now seen persisting over coming quarters. Freight and airfares have already surged, while costs for plastics and polymers, fertilizers, detergents and paints are expected to rise.

Article content

Article content

“Pass-through to other non-fuel prices is clearly starting, touching everything from building products to takeaway food,” said Luci Ellis, chief economist at Westpac Banking Corp. This comes at a time of already elevated inflation, said Ellis, previously an assistant governor at the RBA. 

Article content

“Some observers point to the demand-destruction higher fuel prices can unleash via the hit to real incomes, which will dampen inflation on its own eventually,” Ellis added. “This is plausible, but it will take too long to assuage an RBA facing an extended period of above-target inflation.”

Article content

The case for tightening is supported by still-resilient domestic data. Total credit grew at 8.1% in March from a year earlier, with loans to housing investors rising 9.6% and business credit up nearly 10%. The labor market remains firm, with unemployment near a historically low 4.3%, while household spending has so far held up.

Article content

Article content

Even so, a hike is far from a foregone conclusion after the nine-member board voted in March by the narrowest of margins to raise rates.

Article content

Even before Tuesday’s anticipated hike, the RBA has been a global outlier, with counterparts from the Bank of Japan to the Federal Reserve holding steady last week, citing war-driven uncertainty among reasons. Yet in Asia, where flow-through to fuel costs from the Middle East supply shock is faster, the Monetary Authority of Singapore and the Philippine central bank have been among those tightening policy. 

Article content

Belinda Allen, head of Australia economics at Commonwealth Bank of Australia, expects another split vote this week with some board members likely to favor holding steady given war-related uncertainty and recent sharp declines in consumer and business surveys. 

Article content

“A hike is expected in May but not guaranteed,” she said. “If anything, the decision in May feels more precarious than March,” when the vote was 5-4 to lift rates.

Article content

Factory activity data released Friday also showed Australian manufacturing production fell for a third month in April as businesses reported severe price and supply disruption due to higher fuel prices.