The RBA moved in line with many of its global central bank peers by stepping up to a 50bps rate hike in June after starting its tightening cycle with a 25bps hike in May. With central banks continuing to frontload rate hikes and in response to risks around the domestic inflation outlook, I expect the Board to hike the cash rate target by another 50bps to 1.35% at today's meeting (decision due at 2:30PM AEST) and for the rate on Exchange Settlement balances to lift from 0.75% to 1.25%.
At the June meeting, the Board decided a more rapid withdrawal of the emergency monetary policy settings required during the pandemic was warranted. This came in response to the RBA lifting its forecast for peak inflation in Australia from 5.9% to 7% and with the labour market seeing its strongest conditions in many years, underlined by May's report with unemployment remaining at a near half-century low at 3.9%. Speaking at a recent panel event with other central bankers in Zurich, Governor Philip Lowe indicated the board would again be discussing the merits of hiking by 25bps or 50bps at the July meeting. On that basis, the probability of an even larger hike of 75bps being announced today looks remote.
The key observations from Governor Lowe in his speech on 21 June and in the June meeting minutes were around inflation expectations. Specifically, the RBA had seens signs of the inflation psychology shifting, with firms increasingly gaining pricing power and workers, in the knowledge the labour market was strong, were pushing for higher wages to compensate for cost of living pressures. In that context, the Board assessed there to be a "heightened risk of persistently high inflation" and decided to speed up to a 50bps hike. Governor Lowe said that in order to keep inflation expectations anchored between the 2-3% target band, higher rates are needed to bring growth in spending into closer alignment with the supply capacity of the economy.
Looking ahead, as previously discussed here, I see another 50bps hike coming in August, with the Q2 CPI data likely to prompt the RBA to again revise up its inflation forecasts. That would bring the cash rate to 1.85% where I anticipate the Board to pause its hiking cycle, allowing it to monitor the domestic data and events offshore. Over the past couple of weeks, markets have responded to the slowing global growth outlook by scaling back their expected peak in the cash rate from above 4% to around 3.75% in mid-2023.
Post the August meeting, I expect the RBA will be able to ease back to hiking in 25bps increments. I have a 25bps hike pencilled in for November following the Q3 CPI report and revised RBA forecasts, with the cash rate to end 2022 at just above 2%. That differs from market pricing at around 3%, based on the expectation of the Board hiking at every meeting through to the end of the year.
