Reserve Bank tipped to increase pace of tightening

Economists expect the central bank to increase the pace of tightening to more rapidly withdraw pandemic-era stimulus.

Economists expect the Reserve Bank to raise interest rates this month and increase the pace of tightening to more rapidly withdraw pandemic-era stimulus.

While recent economic data didn’t show that rapid price increases in the past year were flowing through to wages, the RBA may cite its business liaison as justification to opt for a bigger rate rise, as the US Federal Reserve did last month.

Of 29 market economists surveyed by Bloomberg, 15 forecast a 25-basis-point increase in the cash rate to 60 basis points. Eleven expect 40 basis points and three expect 50. Cash rate futures are priced for a 32-basis-point rise in the cash rate to 63 basis points, suggesting traders lean towards 25 basis points rather than 40.

The RBA began its first interest rate rise cycle since 2010 with a bigger-than-expected 15-basis-point rise from a record low 10 basis points to 35 basis points in May.

In his post-meeting statement, RBA governor Philip Lowe said the “board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time” and “this will require a further lift in interest rates over the period ahead”.

“The board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases.”

Dr Lowe said the bank’s “business liaison suggests that wages growth has been picking up” and “while aggregate wages growth was subdued during 2021 and no higher than it was prior to the pandemic, the more timely evidence from liaison and business surveys is that larger wage increases are now occurring in many private-sector firms”.

GSFM investment strategist Steve Miller expects a 25-basis-point increase this month.

He said there doesn’t appear to be any additional information that would lead the RBA to accelerate the pace of tightening this month, but “that is not to say a strong case can’t be mounted for a 40 or 50-basis-point increase,” he said. “Many developed country central banks have increased the policy rate by 50-basis-point increments as the persistence, magnitude and momentum in inflation has surprised, as it has in Australia.

“A 40 to 50-basis-point rise on Tuesday could be framed as a reflection of the lessons learned from the travails of other central banks: that acting early after demonstrable inflation surprises is preferable to later (as) a failure to act now might occasion even more aggressive increases later with an attendant greater growth dislocation. This is the ‘stitch in time saves nine’ approach to rate increases.”