Vivek Maishra

BENGALURU. (Reuters). The Reserve Bank of Australia will hike interest rates Tuesday, the Reserve Bank of Australia joining a list of other central banks that are expected to increase policy more quickly than anticipated.

Economists rethought the RBA’s policies after a surge in inflation that reached the highest annual rate in 20 years. For the first time in seven years, they now expect an interest rate increase just before a federal election.

In a Reuters poll conducted between April 27 and 29, 32 economists predicted that the RBA would hike its official cash rate to 0.25%, which is 15 basis points higher than the record-breaking 0.10% recorded at the May 3 meeting.

One-half of the 32 economists predicted an increase in cash rates to 0.255%, while four forecasted a substantial 40 basis point rise to 0.50%. Rest of the 12 economists expected no changes.

It was quite a shock to see the expectation change since a poll taken in early January showed that most economists expected an increase in interest rates next quarter.

Robert Carnell (regional head of research Asia-Pacific, ING) stated that “now that the rate-hike genie appears to be out of the bottle”, and that there were good reasons for RBA’s front loading of tightening that will inevitably come.”

“All of the barriers the RBA previously set up in opposition to any rate rises have arguably been cleared. RBA is gradually making space for tightening in coming months. A May hike could be possible due to the much-improved inflation rate in 1Q22.

According to the survey, economists also predicted that the RBA would increase its tightening pace. More than two-thirds (23 of 32) of economists predicted that the RBA would increase the cash rate by 0.50% in June. Four forecasts said it would hike the rate to 0.75%.

Among the major banks in local areas, ANZ and NAB are tipping a 15-basis point increase in May. CBA stated it would occur in June.

David Plank (head of Australian economics, ANZ) stated, “We cannot rule out the RBA becoming more aggressive than what we expect. Delivering one or two 50 basis-points rate rate increases earlyon to get cash rate target higher to neutral.”

This could happen in August when the RBA updates its forecasts or at the June meeting, after the RBA has seen the detail of the labor cost data.

Median projections predicted that the benchmark interest rate would rise by 1.00% in September, and 1.50% year-end. This is double the prediction of 0.75%.

Out of 25 respondents, 19 predicted that the cash rate would reach 2.00%.

This is partly due to what major central banks expect to do. In particular, the U.S. Federal Reserve will likely raise interest rates 50 basis points each month in May, and then again in June.

The RBA will act, and it would burden local borrowers already stressed by record mortgage debt levels and rising living expenses. This is a significant issue for Scott Morrison, Prime Minister of Australia, as he campaigned for his re-election bid.

13 out of 20 respondents answered “yes” when asked if they thought the RBA would raise the interest rate before May 21, 2011. Other seven respondents answered no.

Marcel Thieliant is senior economist at Capital Economics. “The rise in inflation clearly indicates that tighter policies are warranted so delaying first rate increase for political reasons is an error.”