RBA Faces Rate Hike Decision Amid Divided Economic Views
The Reserve Bank of Australia (RBA) is set to make a crucial decision on interest rates in September, but economists are divided on whether it will hike or hold.
Traders have swung decisively to a rate hike, priced at an 87% probability, while economists are more divided. Among the big four banks, only NAB has a September rate rise as its 'base case', with the other three expecting the RBA to wait until November.
The key arguments for a rate hike sooner rather than later include Australian inflation being above the central bank's target band of 2-3%, with the annual headline Consumer Price Index (CPI) falling from 3.8% to 3.5% in July, but still higher than economists predicted.
Services price rises remained stubbornly above the RBA's target, indicating domestic price pressures rather than just imported inflation from higher fuel costs. Stronger-than-expected economic growth numbers also support a rate hike, with the Australian economy growing 2.1% over the past year.
However, there are concerns about the impact of further rate rises on housing and consumer spending, particularly given Australia's rapid housing downturn and high prevalence of variable-rate mortgages. Chief economists Paul Bloxham from HSBC and David Bassanese from Betashares both expect a rate hike in September but acknowledge its potential effects.