(AUSTRALIA) – The Reserve Bank of Australia (RBA) is feeling the heat as global central banks take a more aggressive stance to combat rising inflation, following signals from the US Federal Reserve regarding potential interest rate hikes later this year.
In its recent monetary policy meeting, the Federal Reserve maintained US interest rates within the 5.25 percent to 5.50 percent range, as anticipated.
However, the central bank left the door open for further rate hikes, intensifying pressure on other central banks, including the RBA, to follow suit.
Fed funds futures now suggest a 58 percent probability of another rate increase by early next year, while expectations for rate cuts in 2024 have been downgraded.
Increased likelihood of rate hike as fed holds firm
Tano Pelosi, a portfolio manager at Antares Capital in Sydney, expressed frustration at the RBA’s position.
He has long advocated for higher interest rates in both Australia and the US due to persistent inflation and robust labor markets, dismissing discussions of monetary easing as premature.
His stance has been vindicated, as the Fed’s updated projections now anticipate two rate hikes next year, compared to four in its June forecast.
Dr. Pelosi argues that the idea of rate cuts in 2024 was always unfounded. The RBA has kept its cash rate on hold at 4.1 percent, awaiting the full impact of a 4-point tightening to permeate the economy and gauge the pace of inflation.
However, it remains cautious about taking action that might jeopardize the progress made in the job market.
Australian bond futures now reflect full pricing for a rate hike to 4.35 percent by March next year, with the possibility of another increase in the mix.
This is a stark departure from just a week ago when traders had assigned only a one-in-three chance of a rate hike.
Tim Hext, head of government bond strategies at Pendal, suggests that financial markets are currently underpricing the likelihood of a higher cash rate, given the strength of recent economic indicators.
He even speculates that a rate hike could occur shortly after the release of Australia’s third-quarter consumer price index on October 25.
Central banks and analysts worldwide have been taken by surprise at the resilience of the global economy despite aggressive interest rate hikes aimed at taming inflation.
New Zealand, for instance, recently avoided a technical recession, with GDP rising 0.9 percent in the June quarter, exceeding forecasts.
Dr. Pelosi warns of a real risk of a reacceleration in inflation, particularly in economies where monetary policy is not overly restrictive, as is the case in Australia. The surge in oil prices, potentially reaching $100 a barrel, adds to concerns about global inflation.
Dr. Pelosi predicts that Q3 headline CPI in Australia will surpass 1 percent, up from 0.8 percent in the April to June period, pushing the annual reading to 5.2 percent. He cautions that the increase in retail petrol prices is likely to spill over into the fourth quarter.
Australian bond yields have jumped 10 basis points, with the three-year government rate at 4.06 percent and the 10-year rate at 4.32 percent. Three-year bond futures have retreated 12 ticks to 95.95.
Amidst these developments, the Australian dollar briefly rose to US65.11¢ following the Fed policy meeting but later receded to US64.08¢ due to the strength of the US dollar.
The Bank of England is also under scrutiny as bond markets have scaled back expectations of a rate increase to 5.5 percent, with a 50 percent chance now implied after data showed that the UK’s high inflation rate unexpectedly slowed in August. This marks a significant shift from an 80 percent expectation before the data release.