Australia’s Hawkish Pivot Jolts Markets During Election Campaign
RBA Raises Rate and Signals More to Come, Sending Aussie Higher
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One of the developed world’s last remaining doves turned hawkish as Australia’s central bank rocked markets with a bigger-than-expected interest-rate hike in the middle of an election campaign.
Having abandoned his pledge of just two months ago to remain patient, Reserve Bank Governor Philip Lowe topped economists estimates by raising the cash rate 25 basis points to 0.35%. That move and suggestions that more hikes will follow sent benchmark three-year bond yields soaring through 3% for the first time in eight years.
Australia’s policy U-turn reinforces a global trend toward more aggressive action just ahead of a Federal Reserve that’s poised to make its biggest rate increase in more than 20 years. Lowe’s shift is a blow to the country’s center-right government that’s trailing in opinion polls as campaigning intensifies for a May 21 ballot.
“Global central banks are stepping up and they are front-loading rate hikes so why shouldn’t the RBA, particularly when their policy is extremely accommodative,” said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada.
Australian three-year yields jumped 19 basis points and the currency rose as much as 1.4%, before giving up part of the gain to trade at 71.09 U.S. cents. The benchmark stock index fell.
“The RBA managed to wrongfoot every forecaster and even the market -- no one was braced for 25 basis points,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. Economists’ consensus was for a 15 basis-point hike.
Lowe is now trying to recalibrate rate expectations following data last week that showed headline inflation surged to the highest level in more than two decades, while underlying price gains breached the top of the RBA’s 2-3% target.
“I expect that further increases in interest rates will be necessary over the months ahead,” the governor said in a press conference. “The board is not on a pre-set path and will be guided by the evidence and data.”
Lowe conceded it was embarrassing that his previous forward guidance that rates would remain at a record-low until 2024 had proved so wrong. Markets and some economists have been forecasting since last year that the RBA would hike in 2022.
Interbank cash rate futures are pricing in another 25 basis-point hike for June and signal the RBA will raise to 2.75% by year’s end. That’s again well ahead of a central bank whose economic forecasts assume a cash rate of 1.5%-1.75%.
The RBA’s tightening presents a problem for Prime Minister Scott Morrison’s government as the Australian electorate is heavily indebted and already grappling with consumer prices rising much quicker than wages growth.
Commonwealth Bank of Australia, the nation’s largest lender, announced it will raise variable home-loan rates by 25 basis points.
Morrison blamed offshore events for pushing borrowing costs higher, while opposition Labor Party shadow Treasurer Jim Chalmers said the RBA had “completely shredded” the prime minister’s economic credentials.
What Bloomberg Economics Says...
“This was the first time in more than a decade that the central bank lifted rates during an election campaign – a potentially controversial step. We see the over-sized hike and the hawkish tilt of its statement as a way of signaling that the move was unavoidable..”
--James McIntyre, economist
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The RBA’s statement also provided key figures from its quarterly update of economic forecasts that will be released in full on Friday.
- The central forecast for 2022 is headline inflation will accelerate to around 6% and core inflation to around 4.75%.
- By mid-2024, headline and underlying inflation are forecast to have moderated to around 3%
- Australian GDP is seen to grow by 4.25% over 2022 and 2% over 2023
- Unemployment is predicted to decline to around 3.5% by early 2023, the lowest level in half a century
Also on the agenda Tuesday was the central bank’s plan for future bond maturities after it tripled its balance sheet to about A$650 billion to support the economy through the coronavirus pandemic.
The RBA decided against reinvesting the proceeds of bonds that mature in coming months, in effect embarking on a gradual quantitative tightening. The impact of the widely expected decision is likely to be minor over the next year as only a small number of bonds are due to mature.
©2022 Bloomberg L.P.