Commerzbank’s Volkmar Baur highlights strong market conviction that the RBA will deliver a third consecutive rate hike, with futures implying a 75% probability. Inflation and expectations remain well above target and RBA rhetoric has turned more hawkish. Still, prior tightening, softer March data and a split board mean a pause surprise cannot be ruled out.

Hawkish case tempered by recent hikes

"When the Reserve Bank of Australia (RBA) convenes tomorrow morning for its third monetary policy meeting of the year, there is a good chance that a third interest rate hike will result. Only one of the 28 economists surveyed by Bloomberg expects the policy rate to remain unchanged - all others agree that the cash rate will be raised by 25 basis points. And based on futures contracts, the market also sees a roughly 75% chance of a hike."

"And there are, of course, good reasons for this. While inflation in March did not rise quite as sharply as analysts had expected on average. At 4.6% overall, however, it was well above the central bank’s target range (2-3%) and would remain significantly above it even without the energy component. Furthermore, surveys by the Melbourne Institute show that inflation expectations have recently risen to 5.9%. That’s more than 1 percentage point higher than at the start of the year."

"Second-round effects were not yet evident in the March inflation data (it would also be a bit early for that). However, the sharp rise in inflation expectations could make them more likely in the coming months. And this has not gone unnoticed by the members of the central bank."

"An analysis of recent speeches shows that, on average, they have been even slightly more hawkish in the weeks since the last rate hike than they were before."

"However, one shouldn’t be too certain. After all, the RBA has already raised rates twice, and as we know, it takes time for such a hike to have an impact on the real economy anyway."

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