Australian central bank to hike interest rates this week, beating inflation expectations

A Reuters poll shows Australia's central bank will hike interest rates by another half-point on Tuesday and increase borrowing costs further than previously thought in its most aggressive tightening cycle since the 1990s to fight red hot inflation.

At the August meeting, Reserve Bank of Australia RBA Governor Philip Lowe tempered guidance on further hikes as they approached the estimated neutral level of 2.50%, a level that neither stimulates nor restricts economic activity.

The U.S. Federal Reserve raised rates by 75 basis points last week and expected to take borrowing costs higher than previously expected, so central banks are likely to follow suit in order to prevent their currency from weakening further against the U.S. dollar.

The Australian dollar was at its lowest level in two years on Wednesday, down over 12% for the year.

In the Sept. 26 -- 29 Reuters poll, over a 70% of economists, 21 of 29, predicted that the RBA would hike its cash rate by half a point to 2.85% at its Oct. 4 meeting. The remaining eight predicted a 25 basis point hike.

If realized, that would be the fifth successive 50 basis point rise, matching the fastest hiking cycle since 1994 when rates went from 4.75% to 7.50%.

Tony Morris, head of Australia and New Zealand economics at Bank of America, said that a lot of global interest rate expectations are being set in the United States.

If the Reserve Bank doesn't keep the current pace, further currency weakness will feed into a much faster pace of domestic inflation. There was a five way split between economists over where rates would be in the end of 2022, despite the median forecast showing rates going up another 50 basis points next quarter to peak at 3.35%.

One said 3.50% and two said 3.60%, while 11 of 27 economists held the median view. Among the 13 economists, ten said rates would end the year at 3.10% and three said 2.85%.

In an August poll, only four of 29 economists predicted the cash rate at 3.35% by the end of 2022, while the peak rate was expected to be 3.10%.

With inflation at a 21 year high of 6.1%, more than twice the RBA's target range of 2% -- 3% and forecast to stay above that until early 2024, peak interest rate could be revised up again.

11 of 25, or 44%, of analysts said that the current expected peak of 3.35% would be reached by the end of Q 1 of 2023.

The inflation was 7.0% this quarter and peaking to 7.5% in the next year, according to the survey. It was predicted to average 4.5% in 2023 and then fall to 2.7% in 2024.

The Australian consumer price index was down slightly to 6.8% in August from 7.0% in July, according to a new official monthly measure of consumer prices.

Jameson Coombs, economist at St. George Bank, said that the expectation is conditional on several factors, such as medium-term inflation expectations remaining well anchored, a sustainable pick up in wage growth and easing global inflationary pressures.

If upside risks to inflation materialised, the RBA BoardRBA Board might need to go beyond what we expect from the terminal rate. Australia's economic growth was predicted to average 4.0% for this year and then halve to 2.0% in 2023 and 2024.