RBA Seen Hiking as Early as June as Dovish Message Falls Flat

(Bloomberg) -- Sign up for the New Economy Daily newsletter, follow us @economics and subscribe to our podcast.

Reserve Bank of Australia Governor Philip Lowe's dovish message this week failed to shift markets or economists from their view that interest-rate rises will begin in just a few months' time, a survey showed.

Nomura Holdings Inc. and Bank of America predict the first hike will come in June, while nine others see it in August, according to a Bloomberg poll of 18 economists, who expect an initial 15 basis-point move to a 0.25% cash rate.

All-but-one of the remainder surveyed forecast liftoff later in the year, with HSBC Holdings Plc expecting it to occur in the first quarter of 2023.

Read more: RBA May Begin Rate Hikes in Aug. 2022: Survey

The predictions contrast with Lowe's message of patience in Tuesday's rate statement and in his speech the following day, when he argued it's too early to say inflation is sustainably in the RBA's 2-3% target range.

Indeed, he is so confident about contained prices that he's testing to see how low unemployment can go before it sets off rapid wages growth.

Lowe's stance comes even as the central bank forecasts underlying inflation will accelerate to 3.25% in coming quarters, before settling at 2.75%, and unemployment will drop to 3.75%, a level unseen since the early 1970s.

“The RBA's forecast is a little inconsistent with their narrative on rates,” said Diana Mousina, senior economist at AMP Capital Markets, which expects two rate increases this year and four in 2023.

“But they haven't actually said what they expect to do and that could be because they probably don't know themselves, or they have yet to come to some agreement at the board level.”

Most economists see the cash rate in a range of 1-1.5% by December 2023, from a current record low of 0.1%. Financial markets are wagering Lowe will begin hiking in June and take the cash rate to 2% by the end of next year.

Lowe pointed out in Wednesday's speech that Australia's economy had performed “significantly better” in 2021 than the RBA had forecast, prompting upgrades for this year. He also expects the easing of supply-chain blockages as Covid-19 cases begin to wane to help cool consumer prices.

“There is some risk that the inflation genie could be let out of the bottle,” said Besa Deda, chief economist at St George Bank, which is expecting a first rate hike in August. “Lowe seems prepared to take that risk.”