Analysis: A baker’s dozen of questions on Australian monetary policy
The RBA Board meets tomorrow in a meeting now widely expected to see the first increase in interest rates since November 2010. Australian interest rate markets continue to price a very aggressive profile of interest rate increases over the next 18 months, implying the cash rate will end 2022 at around 2.6% and peak around 3.5% in mid-2023. This broadly follows the profile for monetary policy in the US.
In this weekly, we consider a baker’s dozen of questions about Australian monetary policy set out in Table 1, below. We’ll know some of the answers tomorrow afternoon at 2.30pm and learn more about some of the other answers if the RBA does raise rates as NAB expects, as the Governor could be expected to schedule a webinar on Tuesday afternoon as he has done after previous significant policy changes.
NAB expects the RBA to get the cash rate relatively quickly to 1% (by August) and for cash to end the year around 1.25%. We see further tightening in 2023 of 0.75%. We continue to expect that the cash rate will not increase as quickly as currently priced by markets, though we see the risk that the RBA finally realises it is well behind the curve and is forced to adjust rates more quickly towards neutral as other global central banks are now doing. It’s also important to remember that the short end of the Australian interest rate curve has more significance for the Australian economy, whereas in the US, it’s the long end of the curve that is more significant.
It’s also a big week internationally with the Fed, BoE, non-farm payrolls and the ISMs