RBA to hike rates more sharply than most anticipate

The minutes of the RBA’s July meeting showed that the Bank debated a smaller 25bp rate hike but ended up hiking rates by 50bp. Those minutes also included a discussion of the level of the neutral interest rate, which will come into touching distance before long if the Bank keeps hiking rates aggressively. Nonetheless, we still think there’s a decent chance that the Bank will deliver a hefty 75bp hike at its upcoming meeting in August. For one thing, the unemployment rate has now plunged to 3.5%, a level that the Bank only expected to be reached by the middle of next year. It will probably fall further over coming months. What’s more, the Q2 inflation data, due on 27^th July, should show another very strong increase in consumer prices. Either way, we’re increasingly confident in our above-consensus forecast that interest rates will peak at 3.6%. Australia Drop-In (15:00 SGT, 27^th July): Join our 20-minute briefing on why we think Australian inflation is heading higher than the consensus expects, how the RBA will have to raise rates by more than most appreciate to tame it, and what it all means for Aussie asset prices. Register now