Economists split on whether Australia to pause tightening cycle

ECONOMISTS are divided over whether the Reserve Bank of Australia (RBA) will raise interest rates for an 11th consecutive meeting or pause its most aggressive tightening cycle since 1989 amid cooling economic momentum.

Sixteen economists surveyed by Bloomberg News, including Commonwealth Bank of Australia (CBA) and Westpac Banking, forecast the RBA will stand pat at 3.6 per cent on Tuesday (Apr 4), as do money markets. Goldman Sachs Group and ANZ Group Holdings are among 11 that see a quarter-point hike to 3.85 per cent.

“This is looking like a finely balanced decision,” said James Wilson, a senior portfolio manager at Jamieson Coote Bonds in Melbourne. He is expecting either “a dovish hike or a hawkish hold” from Australian policymakers.

The RBA meets after the Federal Reserve and the European Central Bank pushed ahead with policy tightening irrespective of financial volatility caused by banking collapses. By contrast, the Bank of Canada and Bank of Korea opted to stay on the sidelines as higher rates slow inflation and their economies.

Given South Korea came before the bank stress and Canada’s move was long telegraphed, a pause by Australian policymakers would be the first by a major developed-world central bank since the crisis began.

Governor Philip Lowe has surprised markets at the past two meetings: first with a hawkish tone in February that set the stage for that month’s global bond rout; and then with a dovish tack in March in a shift that appeared more in tune with souring global sentiment.

Lowe’s February take came after a report showed hot inflation in the final three months of 2022; his March comments followed monthly data suggesting the fourth quarter was likely CPI’s peak. That has since been backed by a second monthly report that again came in cooler than expected.

Economists favouring an RBA pause cite the faster-than-expected easing of inflation in February and more subdued consumer spending as well as worries about bank stresses becoming systemic.

“The domestic economy is now showing sufficient signs of slowing and we expect the RBA board will judge that a pause in the tightening cycle is the appropriate move,” said Gareth Aird, head of Australia economics at CBA, the nation’s largest lender. “The RBA does not want a recession.”

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Another worry is the impending expiry of a swathe of home loans fixed for two-to-three years at record low rates during the pandemic. Around 90 per cent of fixed mortgages rolling off this year will see repayments increase by 30 per cent or more, according to an RBA paper last month.

Australian households are among the most leveraged in the developed world, with a debt-to-income ratio of almost 188 per cent, underlining the need for the RBA to tread with caution.

Economists calling for a hike argue inflation, at 6.8 per cent in February, is still well above the RBA’s 2-3 per cent target and the job market is very tight, with unemployment hovering near a 50-year low of 3.5 per cent. Besides, international experience has shown that one or two months of soft data don’t necessarily mean a trend.

“Australian inflation is far too high — with clearer signs of an acceleration from persistent sources in the services sector,” said Andrew Boak, chief Australia economist at Goldman Sachs. He said that it’s hard to justify a pause when other major central banks including the Fed have “continued to hike rates through a period of much more intense market volatility”.

Lowe will have an opportunity to explain his decision and his broader assessment on the economy in a speech on Wednesday at the National Press Club in Sydney. Many economists expect the governor will signal further hikes ahead even if he does decide to pause on Tuesday given inflation is seen staying higher for longer.

The RBA’s own forecasts show inflation only returning to the top of its target in mid-2025.

“The window to hike further appears small,” said Su-Lin Ong, chief economist at Royal Bank of Canada. Even so, “we expect the RBA to retain an explicit tightening bias, unlike its Canadian counterpart, given the still elevated pace of inflation and challenges ahead.”

The added advantage of waiting until May is the RBA will have first-quarter inflation data and updated staff forecasts at its disposal in a month’s time.

On Thursday, the RBA releases its semi-annual Financial Stability Review, a deep dive into the banking sector that likely will discuss potential areas of risk in the system.

RBA officials and Treasurer Jim Chalmers maintain that Australian banks are strong, with solid balance sheets and high profitability, meaning contagion from the US and Europe is unlikely. Chalmers, who last week convened a meeting of the nation’s top financial regulators, said authorities are well placed to cope with the rising global uncertainty.

In mid-April, Chalmers will release the findings of an independent review of the central bank, with its recommendations likely to inform the treasurer’s view on whether to extend Lowe’s tenure that expires in September. The governor’s two predecessors both had their seven-year terms extended by another three years. Chalmers is expected to announce a decision in June. BLOOMBERG