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Australia Poised for First Rate Hike Since 2010 in Election Jolt

© Reuters.

(Bloomberg) — Australia’s central bank is expected to raise interest rates for the first time since 2010, a survey of economists showed, a decision that would catapult it to center stage of the nation’s hard-fought election campaign.

Eighteen of 21 economists predict the Reserve Bank will lift the cash rate at Tuesday’s meeting. Of those, 13 see a 15 basis point hike to 0.25% — the same as money markets — and five a supersized 40-basis-point boost to 0.5%. The rest — including Commonwealth Bank of Australia (OTC:CMWAY) — say it will stand pat.

Initiating a tightening cycle less than three weeks out from a May 21 ballot would be a blow to Prime Minister Scott Morrison, who has campaigned on his center-right government’s strong economic record. The centerpiece of his bid for a come-from-behind election victory is that interest rates and taxes will always be lower under a conservative administration.

The last time the RBA raised rates during a campaign was in 2007, with then Prime Minister John Howard going on to lose the election and some of his colleagues blaming the central bank for the defeat. Opinion polls suggest the opposition Labor Party will win next month’s ballot.

A hike would see the RBA falling into line with international counterparts like the Federal Reserve, Reserve Bank of New Zealand and Bank of Canada, which are all in the midst of tightening cycles in a bid to tame inflation.

Until earlier this week, economists expected the RBA would avoid becoming embroiled in the political debate by keeping the cash rate at 0.1% and waiting to see wages data on May 18. But Wednesday’s CPI report showing annual headline inflation surged above 5% and core consumer prices accelerated to 3.7% resulted in a rapid shift in views.

Australia’s Hot Inflation Builds Case for Election Rate Hike (3)

“The breadth and momentum in the CPI report strongly suggests that it would be imprudent for the RBA to wait for more data on wages,” said Felicity Emmett, a senior economist at Australia and New Zealand Banking Group Ltd. “After all, it is inflation that the RBA targets, not wages.”

Governor Philip Lowe recently cited the RBA’s business liaison program to suggest that wages growth was picking up, one reason why he shifted to a more hawkish stance last month.

The central bank releases its quarterly update of forecasts next Friday and Emmett expects an upgrade to the outlook for core inflation to 4.25% in the 12 months through June, easing to 4% through December — both well above the central bank’s 2-3% target. “This adds to our conviction that the RBA will tighten,” she said. 

The median estimate of economists is for consecutive monthly rate hikes from May through August and for the cash rate to reach 1.5% by year’s end.

©2022 Bloomberg L.P.

Australia Poised for First Rate Hike Since 2010 in Election Jolt

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