The Reserve Bank of Australia gave markets a jolt today with a 0.25% hike to its cash rate, bringing the figure to 4.75%. The Australian interest rate cycle continues… and inflation concerns are the reason why.
Annette Beacher at TD Securities even found the central bank’s latest statement to be one of the most hawkish yet:
The communiqué was hawkish (see over)
The conclusion was very strong, where “the economy is now subject to a large expansionary shock from the high terms of trade and has relatively modest amounts of spare capacity”. This is the strongest language the Board has used all year, but is hardly new news!
As we published yesterday, the TD-MI inflation gauge suggests that the benign September quarter CPI report may be the low point for this cycle. The RBA seems to agree, where “, the moderation in inflation that has been under way for the past two years is probably now close to ending”. We forecast 31⁄2% by H2 2011.
This rate-hike cycle won’t be ending any time soon either:
What is out of kilter is pricing of RBA tightening throughout 2011. We expect +100bp over next year, for a cash rate of 5.75% (adding an extra +25bp with today’s surprise move) while the OIS is pricing a cash rate closer to 5.0% by end-2011.
Aussie dollar? Loving it.
(Excerpts and rate chart above via TD Securities, “RBS acts, market caught out again” , Annette Beacher, 2 November 2010)