RBA Watchers Split as Policy Tightening Cycle Is Nearing End

(Bloomberg) — Australia’s policy tightening campaign is approaching its final stages, with money markets and economists divided over the timing of the Reserve Bank’s likely last interest-rate increase in this cycle.

Traders expect the RBA will hold its cash rate at 4.1% for a second straight meeting on Tuesday after quarterly inflation eased and retail sales surprisingly fell. In contrast, a majority of economists expect a 25-basis—point hike to ensure a tight labor market doesn’t fuel wages while price gains hover at twice the central bank’s target levels.

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Australia’s policymakers convene after the Federal Reserve and the European Central Bank increased rates last week, while nearby New Zealand has already paused its tightening cycle. The challenge for the RBA is finding the right balance — not stop too early and give prices a chance to revive and not go too hard and bring about a recession.

This meeting “will be another line ball call,” said Belinda Allen, a senior economist at Commonwealth Bank of Australia, who sees a quarter-point hike as the path of least regret. “This should provide an offset to any lingering risks in the inflation and wages outlook.”

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The US appears to be on track for a soft landing after its economy shone in the latest report card despite the Fed’s most aggressive tightening campaign in a generation. Outgoing Governor Philip Lowe maintains the RBA is still on a narrow path to a similar outcome.

Some economists expect Lowe to raise rates during his final two meetings at the helm before departing in mid-September. That would provide incoming Governor Michele Bullock with a clean slate as she confronts the task of implementing the 51 recommendations from a review of the central bank.

Also, unemployment at 3.5% is still about one percentage point away from the level that the RBA had said will enable inflation to return to the top of its 2%-3% target in mid-2025.

Those predicting a pause argue that monetary policy is already restrictive, with retail sales data for June highlighting how cost of living pressures weigh on private consumption that accounts for two-thirds of Australia’s economic output. How consumers respond to higher borrowing costs are important considerations for the RBA.

“For now, it seems to us that stepping back, waiting a couple of quarters and seeing how things pan out is probably the most appropriate course of action,” said Adam Boyton, head of Australian Economics at ANZ Holdings Ltd. Weakness in job vacancies and business conditions suggest that tightening is taking hold, he said.

Also closely-watched by Lowe and his colleagues is the impact of higher mortgage repayments on households.

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Latest data from Equifax showed a rising trend of missed mortgage payments in yet another sign that rate increases are taking a toll on home owners. The number of accounts in 1-29 days of arrears rose by 36% in the second quarter from a year ago while those in 30-89 days of arrears increased 33%.

“We have consistently argued that policy rates need to be a little more restrictive,” said Su-Lin Ong, chief economist at the Royal Bank of Canada, who pushed back on Friday her 25-basis-point rate hike forecast to the fourth quarter following last week’s inflation and retail data.

“But, we have also highlighted the RBA’s dovish tendencies underpinned by a desire to maintain the labor market gains of recent years and its willingness to tolerate a slower glide back to within target inflation,” she said.