Can the RBA Reach Terminal Rates Faster?

There is a solid consensus about the next rate hike from the RBA but uncertainty about whether the bank will signal another hike.

Hikes to the Forefront After CPI Spike

It seemed like the RBA was on track to hold off on further rate hikes, but the latest CPI figures changed that. Other data figures, such as employment numbers, pointed towards slower economic growth and the need for the RBA to stop hiking. But now the consensus is near unanimous that Australia's central bank will hike by another 0.25%, leaving the rate at 3.35%.

With such a solid agreement, the focus shifts to what comes after the meeting, particularly what the RBA could signal for the next steps. The RBA was one of the last major central banks to start raising and started to slow down earlier than others. But inflation hasn't turned the corner yet. Nevertheless, the consensus among analysts still agrees on the terminal rate for the RBA. In terms of expectations, what changed after the CPI release was how fast the RBA would reach the peak of its rate hiking cycle, not how high it would go.

Bank's Hiking Ability Limited

The issue is whether Australia's Governor Philip Lowe will hint at another rate hike or a pause. One of the options other central banks have taken is to say that policy is "data dependent", allowing a certain amount of hedging. But this might be more difficult for the RBA since inflation figures are only made available each quarter, so there would be no update on the price situation until after the next meeting. And what's driving expectations, for now, is precisely inflation.

The RBA has to keep a cautious eye on the domestic housing market, which has limited how much hiking it can do compared to other central banks. A substantial number of home loans are expected to be renewed this year, which could impact the available income for many Australians. So, comments on the housing sector could have an outside impact on rate expectations in Australia.

Wedge Signals Potential Reversal

The Aussie peaked at $0.7158 against the dollar following an upward spiral that completed a rising wedge. At this stage of the cyclical move, the pattern is typically associated with reversals, i.e. short-term pullbacks or longer-term directional legs. The breakout incurred at $0.6983; if 0.6872 succumbed to bearish pressure, it could open the door to the 68-cent handle. Recapturing the breakout level could threaten bears, particularly if bulls regain control of the 70 and 71-cent thresholds.

Source: Spreadex

Key Takeaways

The RBA is expected to hike rates, leaving the rate at 3.35%, but may pause at the next meeting depending on hints from Governor Philip Lowe. Inflation figures have a large part to play in this decision since the last spike, as the RBA must keep an eye on the domestic housing sector, the number of home loan renewals and income for Australians while considering the next round or CPI print four months from now. The Aussie dollar is at the crossroads of a potential reversal, with a rising wedge recently completed.