RBA Chief’s History of Caution Threatens Rates Traders’ Wagers

(Bloomberg) -- Australian money markets reckon the Reserve Bank will respond to surging inflation with the most aggressive round of policy tightening since the 1990s, a trajectory that appears to conflict with Governor Philip Lowe's history of caution.

Having taken the helm at the RBA in September 2016, Lowe's first interest-rate move came almost three years later when he lowered borrowing costs in June 2019, bringing to an end 30 consecutive meetings of unchanged decisions.

The governor did respond rapidly to the pandemic. But he has been seen to be behind the curve over the past year, reflected in the RBA being forced to scrap yield curve control in November and call time on bond buying in February.

Yet that hasn't stopped traders from pricing in 2.4 percentage points of rate increases by the end of 2022 -- which would be the steepest annual pace since 1994 -- including at least two jumbo hikes. The last time the RBA raised rates by more than 25 basis points was in 2000.

Bill Evans, chief economist at Westpac Banking Corp., expects the RBA will hike by 15 basis points to 0.25% today and then tighten at a steady pace to reach 1.5% by year's end. His forecasts provide for the RBA to hold fire at two of the seven remaining meetings for 2022.

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Evans highlights that Australia's central bank meets more often than key international counterparts -- 11 times a year versus eight for the Federal Reserve -- which enhances the potential for a more incremental approach.

“The RBA board has more flexibility than the other central banks that have or are confidently expected to move to 50 basis point changes,” Evans said in a research note. “That means that it can take a more cautious approach.”

As a result, there's potential for Australian bonds to outperform peers once the RBA starts its tightening cycle, given the median estimate of economists is for the cash rate to end the year at 1.5%, about a percentage point below what swaps and futures traders are pricing in.