AUSTRALIA’S central bank will raise interest rates by 25 basis points next quarter in their last hike of the cycle, economists polled by Reuters said following a surprise pause on Tuesday.

On Aug 1, the Reserve Bank of Australia left rates unchanged for a second straight month, stating the 400 basis points worth of rate rises over the past 16 months were working to cool demand as inflation showed signs of easing.

While the decision to hold was in line with interest rates futures pricing, it startled a majority of economists who had expected the RBA to hike borrowing costs as inflation at 6.0 per cent is double the upper end of the central bank’s target range.

“The Board is now more confident about achieving its inflation objective of moving into the 2–3 per cent band by end-2025.

Not achieving the middle of the target band even by end-2025 seems problematic but the Board seems unfazed about that,” noted Bill Evans, chief economist at Westpac.

“The decision not to raise rates for a second month despite clear evidence of a very tight labour market indicates that the Board will need to see the impact of tight labour markets on inflation.”

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With inflation not expected to fall to the 2-3 per cent target any time soon and the RBA often going against the consensus view since late last year has made forecasting the central bank’s next move increasingly difficult for economists.

A majority of respondents, 18 of 28, forecast the RBA to add at least 25 basis points to its official cash rate by year-end with 13 expecting the first hike not to come until next quarter. The median puts it at 4.35 per cent.

The remaining 10 expected it to stay at 4.10 per cent, in line with market pricing.

That was an abrupt change in expectations from a week ago when nearly 75 per cent of economists, 23 of 31, were expecting rates to reach 4.35% or higher this quarter.

“The RBA now appears comfortably in data-dependent mode, with little suggestion that it needs to front-load the tightening that is incorporated in its forecasts. However, its inflation path suggests little room for surprises,” noted Chris Read, Australia economist at Morgan Stanley.

“As such, we now expect a final rate hike at the next forecast update in November, lowering our terminal rate forecast from 4.60 per cent to 4.35 per cent. The risk to our forecast is a more extended period on hold.”

More than 80 per cent of respondents, 24 of 29, expected the RBA to hold its official cash rate at 4.10 per cent on Sept 5. Only five respondents expected a 25 basis point hike.

All major local banks – ANZ, CBA, NAB and Westpac - predicted a pause in September. Of the four, only NAB expected further tightening from the central bank.

Median forecasts showed rates being held steady at 4.35 per cent until end-March. A 25 basis points rate cut was expected every quarter thereafter, taking rates to 3.60 per cent by end-2024. REUTERS