Commerzbank’s Volkmar Baur now anticipates that the Reserve Bank of Australia (RBA) will follow market pricing and deliver an interest rate hike next week, reversing earlier expectations of no further tightening. This shift comes as market pricing reflects a 90% probability of a rate hike, with Bloomberg consensus also expecting the move. Recent speeches by RBA members have hinted that another rate hike would likely be necessary, further reinforcing market expectations [1].
Inflation in Australia stood at 3.5% year-over-year in July, but sharply rising gasoline and diesel prices are expected to have pushed the rate significantly higher in August. The official inflation figures for August will be released next Wednesday, one day after the RBA meeting, but it is assumed that the RBA already has an indication of the likely direction of the data [1].
Despite the inflationary pressures, several domestic indicators suggest economic weakness. The Purchasing Managers’ Index released yesterday points to an economic slowdown, the unemployment rate has risen from 4.5% to 4.6%—its highest level in nearly five years—and the real estate market has decelerated rapidly, with falling prices in major cities such as Sydney and Melbourne [1].
Baur notes that while inflation is undeniably too high, an interest rate hike would not address the global price of diesel, and the broader economic momentum does not support further tightening. Nevertheless, the market appears convinced that the RBA will proceed with a hike, and Baur expects the central bank to align with these expectations on Tuesday [1].
CONCLUSION
Despite softening domestic economic indicators and doubts about the fundamental case for tightening, the RBA is expected to deliver a rate hike in response to strong market expectations and persistent inflation. The market impact is likely to be high, as the decision aligns with a 90% probability priced in by markets and consensus forecasts.