RBA expected to go for another 25 basis point hike on Tuesday

Two women walk next to the Reserve Bank of Australia headquarters in central Sydney.

The decision on whether to hike or hold rates is on a knife edge, as economists polled by Reuters indicate that Australia's central bank is expected to go for a final 25 basis point interest rate hike to 3.85% on Tuesday.

The bank signalled this month a possible end to its current tightening cycle, as it did in December, as it rose to a more than three-decade high of 7.8% in Australia last quarter, well above the central bank's target of 2% -- 3%.

The slowing monthly inflation numbers suggest that the peak may already be in the rear-view mirror, as the Reserve Bank of Australia RBA focuses on more detailed quarterly inflation data due on April 26, while the less detailed monthly inflation numbers are due on April 26.

The latest poll of 27 economists taken March 27 -- 30 showed that the RBA would increase its cash rate by 25 basis points to 3.85% at its April 4 meeting. The market is not pricing in any further hikes from the current rate.

While just over half of the 14 of 27 predicted the cash rate to increase, the remaining 13 saw a pause at 3.60%. After the inflation data was released to confirm their views, some regular contributors could not be reached and were not included in the poll.

Eight of the 13 economists expect a pause in the second quarter, but they also expect a hike in rates later in the second quarter.

The softer headline inflation print for the month of February will not be enough for the RBA to abandon their tightening bias as labour market indicators, forward indicators and the still comparatively high level of inflation all point to the need for further tightening, said Benjamin Picton, senior macro strategist at Rabobank.

ANZ and NAB predicted a hike at the April meeting, with ANZ predicting a higher terminal rate of 4.10%. The central bank, which was late joining the current tightening cycle, only starting in May 2022, has been keen since December to end it, which is why forecasters are divided in part because of mixed messages from the central bank.

Gareth Aird, head of Australian economics at CBA, said that the communication of the RBA has been somewhat erratic since the beginning of the year.

In a short period of time, the RBA has both dialled up and down their rhetoric on how much tighter they think they are going to deliver. The RBA has raised rates by 350 basis points, less than some of its peers, such as the U.S. Federal Reserve, the Bank of England and the Reserve Bank of New Zealand.

Minutes from the March meeting showed RBA board members reconsidered the case for a pause at the following meeting, noting that monetary policy was already in restrictive territory and the economic outlook was uncertain.

The median forecast showed the cash rate would remain at 3.85% until the end of 2023, but five economists predicted it to peak at 4.10%. Two did not expect any change from the current 3.60%, while five expected at least one rate cut by the end of the year.

Nearly two-thirds of the 11 people who answered an additional question said the bigger risk to their terminal rate forecast would be lower than predicted, while the remaining four said it would be higher.

Money market traders are not expecting a move through the end of the year.

Inflation was not expected to fall to within the target range until the third quarter of 2024, averaging 5.4% this year and 3.1% in 2024, up from 5.2% and 2.9% in a January poll.