Rare cut hopes diminish energy prices remain a concern
Given the current macroeconomic environment, here is what to expect from the RBA’s March 17 policy decision.
Australia’s official cash rate is widely expected to rise by 25 basis points to 4.10% when the Reserve Bank of Australia announces its latest policy decision on March 17.
The RBA monetary policy board will determine whether further policy tightening is necessary because of present economic conditions.
Expectations for a rate hike have increased across financial markets as economists from all four major Australian banks last week revised their forecasts which now support a 25 basis point increase.
This change in expectations comes from the view that inflation is still high. Economic activity also remains above the economy’s capacity while the labour market stays tight.
The economic environment however has changed quickly in recent weeks. According to Commonwealth Bank of Australia the March policy meeting now takes place in a very different situation than what policymakers expected just a few weeks earlier.
The outbreak of war in the Middle East has added a new layer of uncertainty because the conflict has affected global energy prices.
Higher oil prices intensify inflation pressures which were already persistent in the Australian economy.
ANZ economists said the initial impact of the conflict will likely appear through inflation rather than economic growth although higher energy costs could later reduce consumer spending because household disposable income may come under pressure.
Westpac and NAB economists hold a similar view because they believe the conflict involving Iran raises the probability of a rate hike as policymakers may try to avoid an additional inflation surge caused by rising energy prices.
Higher interest rates often support bank profitability because lending margins expand although sectors that rely heavily on borrowing such as property and infrastructure can face pressure.
Consumer focused industries may also experience strain because higher borrowing costs along with rising living expenses can reduce discretionary spending across households.
(Source : Reuters)
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