Sydney - A growing cohort of economists, including those at Westpac, National Australia Bank and Deutsche Bank, now predict the Reserve Bank of Australia (RBA) will lift interest rates at its meeting next week, reflecting concern about the inflationary impact of higher oil prices after a regional conflict.
Market participants have shifted pricing to reflect approximately a 75% probability that the RBA will raise the cash rate by 25 basis points to 4.1% at the meeting scheduled for next Tuesday. The reassessment follows a spike in oil prices as tensions in the Middle East intensified, prompting renewed worries about near-term inflationary pressure.
RBA Deputy Governor Andrew Hauser, speaking to The Conversation, highlighted the upward pressure on inflation stemming from the recent jump in oil prices and said he expected debate among Monetary Policy Board members about whether to tighten policy at the coming meeting.
Economists at Westpac point to the scale of the oil shock while noting its likely temporary nature. "The effect of higher oil prices on headline inflation is large but temporary," said Luci Ellis, chief economist at Westpac. Nonetheless, Ellis added, the board is likely to feel compelled to respond, especially since the hit so far to confidence and financial markets has not been severe.
The RBA raised rates last month to 3.85% after inflation reaccelerated following three reductions the previous year. Headline inflation stood at 3.8% in January, while the trimmed mean measure rose to 3.4%, both above the RBA’s target band of 2% to 3%.
Phil O'Donaghoe, chief economist at Deutsche Bank, said his prior view that volatility linked to the Iran war reduced the likelihood of a March hike was revised after Hauser’s comments. "Our read of Hauser’s remarks is that this conclusion was the wrong one," O'Donaghoe said. He added that while a further amplification of the conflict could still prompt a pause, Deutsche Bank's base case is now for a rate increase next week.
This evolving consensus among economists and market pricing underscores how external supply shocks to energy prices can quickly change the near-term policy outlook, even when some of those effects are judged temporary by officials and forecasters.