Australia’s central bank will raise its benchmark interest rate to a peak of 3.85% from May, economists said in an upgrade of their forecasts following Governor Philip Lowe’s hawkish policy statement.
(Bloomberg) — Australia’s central bank will raise its benchmark interest rate to a peak of 3.85% from May, economists said in an upgrade of their forecasts following Governor Philip Lowe’s hawkish policy statement.
The median estimate was lifted by a quarter-percentage point after Lowe said that further hikes will be needed “over the months ahead” and his decision to drop a qualifier that the Reserve Bank wasn’t on a pre-set policy path. It raised the cash rate to 3.35% on Tuesday.
The Bloomberg survey of 19 economists showed a high estimate for the terminal rate of 4.1% from May, as seen by Goldman Sachs Group Inc. and Bank of America Corp. The low estimate of 3.6% in the same month was predicted by UBS AG, AMP Capital Markets and QIC Ltd.
Money market bets imply the RBA’s cash rate reaching around 4% by mid-2023.
Lowe’s comments were spurred by a surge in core inflation in the final three months of last year to 6.9% from 6.1% in the third quarter. That was faster than the RBA’s forecast of 6.5% and exceeded readings in the US and UK.
The central bank now only expects inflation will return to around the top of its 2-3% target band in mid-2025.
“The ongoing strength in inflation and the prospect of such an extended period of inflation well above the target continues to raise the risk that medium term inflation expectations become unanchored,” said Felicity Emmett at Australia & New Zealand Banking Group Ltd. who forecasts a 3.85% terminal rate.
“We still see the risks to that peak as tilted to the high side given the momentum in inflationary pressure,” she said.
The RBA has raised rates by 3.25 points since it began tightening in May, compared with 4 in New Zealand and 4.5 in the US. The slower pace reflects Lowe’s efforts to bring the economy in for a soft landing, though Tuesday’s statement suggests inflation is now front and center for policymakers.
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