- Our response depends on the size and persistence of the price shock
- For now, that is all very uncertain
- There will be very genuine policy debate at the board meeting with arguments on both sides
- Rise in oil prices clearly an upside risk to our inflation projection, but still in a state of flux
- A 5% peak for inflation probably looks a little on the pessimistic side
- Uncertainty over developments in Iran is extremely high
- Recent data seems to have confirmed even more decisively that economy has limited spare capacity
- Not all domestic data came in strongly as expected though, including consumption
- Australian economy in many ways is in good shape
The RBA was the first major central bank to pivot back to rate hikes last month, as seen here. And they are by some distance still the most hawkish among the others, which has been a key reason underpinning the Australian dollar to start the new year.
Even with testing times from risk aversion and dollar bids, AUD/USD is still keeping above 0.7000 after surging past the key level in late January. The currency pair is up 6% on the year still, reaffirming the aussie as a hot pick for one of the stronger performers this year.
As for RBA rate hike odds, a move next week might be a bit of a coin toss. The RBA did go with a more hawkish tone in February but one can argue that they definitely intend to take a more cautious approach so as to not overdo tightening policy.
However, the US-Iran conflict threatens stronger price pressures at a time when the central bank is already struggling to keep it down. So, there’s that to consider.
The odds of a 25 bps rate hike next week are at ~35% currently with ~61 bps of rate hikes baked in by year-end.
