Australian Dollar: RBA may follow hawkish market pricing – Commerzbank

Commerzbank’s Volkmar Baur now expects the Reserve Bank of Australia (RBA) to follow market pricing and deliver a rate hike next week, despite earlier assumptions of no further tightening. Inflation is above target and likely boosted by fuel costs, but domestic indicators and housing are softening. Baur doubts the fundamental case for tightening, yet sees the RBA aligning with market expectations.

Market pricing pushes RBA toward hike

"Just a few weeks ago, we had assumed that the Reserve Bank of Australia would not raise interest rates any further. And from a purely economic standpoint, we see plenty of reasons why it should hold off on raising rates next week. However, the market is now pricing in a 90% probability of a rate hike, and according to Bloomberg, the consensus also expects a hike. Furthermore, members of the central bank themselves hinted in their latest speeches that another rate hike would likely be necessary."

"But first things first: In July, inflation stood at 3.5% year-over-year. However, sharply rising gasoline and diesel prices are likely to have led to a significantly higher rate in August. The official figures won’t be released until next Wednesday - one day after the RBA meeting. But we’re assuming that the RBA already has a sense of which direction this figure is likely to go."

"That said, that’s about it for the arguments in favor of a rate hike. Sentiment indicators, such as the Purchasing Managers’ Index released yesterday, point to an economic slowdown; the unemployment rate rose this morning from 4.5% to 4.6% - its highest level in nearly five years - and the real estate market has recently decelerated rapidly, with falling prices, particularly in the major markets of Sydney and Melbourne."

"Inflation is too high. That much is undisputed. However, an interest rate hike won’t do anything to counter the global price of diesel. And the broader economic momentum doesn’t exactly point to further interest rate hikes. The market seems convinced. Based on the fundamental data, I’m not. But the RBA will likely follow the market on Tuesday."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)