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Australia Set for Back-to-Back Rate Hikes Amid Split Over Size

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(Bloomberg) — Australia’s central bank is poised to implement back-to-back interest-rate increases for the first time in 12 years on Tuesday, economists and traders predict, with the key debate centering on the size of the move.

Reserve Bank of Australia Governor Philip Lowe and his board will raise the cash rate by 40 basis points to 0.75%, according to 11 of 23 economists surveyed by Bloomberg as well as money markets. Three analysts see a half-point rise, while the remaining nine forecast a standard 25-basis point hike.

The RBA began tightening in May following a sharp acceleration in inflation, bringing it in line with peers like the Federal Reserve and the Bank of England. Figures last week showed solid momentum in the A$2.2 trillion ($1.6 trillion) economy and rising labor costs, fanning fears of even faster price gains ahead.

“Policy needs to lean more strongly against the broadening of inflation pressures,” said Felicity Emmett, a senior economist at Australia and New Zealand Banking Group Ltd. “The strength of the price and wage measures in the GDP data should be enough” to persuade policy makers to hike by more than the regular quarter point, she said. 

The nation’s four major lenders are also divided: ANZ and Westpac Banking (NYSE:WBK) Corp. are forecasting a 40-basis point increase; while Commonwealth Bank of Australia (OTC:CMWAY) and National Australia Bank (OTC:NABZY) Ltd. are predicting a 25-basis point hike. 

CBA, the nation’s largest bank, and NAB maintain a weakening property market and still-tepid wages growth provide scope for the RBA to raise at a slower pace. In addition, because it meets more frequently than counterparts like the Fed, it doesn’t face the same pressure to move in larger increments.

“The RBA is not facing a wage‑price spiral like in some other jurisdictions,” said Gareth Aird, head of Australia economics at CBA, who cited a change of government as another reason for a smaller increase. 

Prime Minister Anthony Albanese’s Labor party won a May 21 national election, bringing to an end nine years of center-right Liberal-National government.

“The optics of delivering a larger than 25-basis point increase in the cash rate in June might imply that the RBA board has changed its assessment of the outlook for inflation or inflation risks based on the change of government,” Aird said. “That is not a message we believe the RBA would want to send.”

There are also concerns that rapid increases in borrowing costs will squeeze Australia’s heavily indebted households. That in turn would crimp consumption, which accounts for about 60% of economic output. 

This risk is a key reason why most economists, including those predicting an outsized increase tomorrow, expect the RBA will conclude its tightening cycle with a cash rate of less than 2%. That contrasts with money market pricing for a rate of 2.8% by December and 3.6% a year from now.

“If we continue to see the slowing in housing at the same pace as has been in May then it will do some of the RBA’s work for them,” said Diana Mousina, a senior economist at AMP (OTC:AMLTF) Capital Markets. 

“Slowing momentum in the housing market is negative for the household wealth effect and will slow down consumer spending so the RBA may not have to do that many rate rises.”

©2022 Bloomberg L.P.

Australia Set for Back-to-Back Rate Hikes Amid Split Over Size

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