Bank of America pulls forward RBA rate hike expectation to next week
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The news: Economists at the Bank of America now expect the RBA to hike the cash rate by 25 basis points next week due to the “material upside inflation risk” from the oil price shock spurred by the US-Israel war with Iran.
The context: The Bank of America economists said in a research note “given above-target inflation and a tight labour market, we see no compelling reason to delay the inevitable”, even though this runs against consensus and market pricing for a hold.
The bank’s previous expectation was for a hike in May.
“The conflict has shifted the distribution of risks, and in our view, a hike in March would reinforce inflation credibility and be consistent with the Board’s approach to respond to ‘the evolving assessment of the outlook and risks to guide its decisions’,” the research note reads.
Economists’ expectations of the impact of the war tend to fluctuate in line with their expectations for its duration.
AMP chief economist and head of investment strategy Shane Oliver, who believes there is a 60% chance of a “limited war”, suggesting that US President Donald Trump is “likely finding a way to declare victory sometime in the weeks ahead”.
Therefore, he believes the RBA has a “strong case to wait till May on rates as the boost to inflation could prove temporary” although it will “sound hawkish in the interim”.
“Key to watch for will be a sustained fall in missiles & drones coming from Iran, indications Iran wants to negotiate and a 10% or more top to bottom fall in US shares which may up pressure on Trump to find a way out,” Oliver’s note reads.
Separately, CreditWatch chief economist Ivan Colhoun argues that the business conditions holding at their long-run average in February, according to the latest NAB Business Confidence report, alongside “elevated capacity utilisation and rebounding price and cost pressures reinforcing the case that inflation remains inconsistent with the RBA’s 2.5% target”.
“Taken alongside the RBA’s slow forecast return of inflation to target, the NAB survey strengthens the case for a further near‑term rate increase, with the Board likely to seriously consider a 25bp move at next week’s meeting,” Calhoun said.
The sources: Bank of America research, AMP research, CreditorWatch research
