RBA to raise rates to 0.25% on Tuesday, to end year at 1.50%: Reuters poll By Reuters

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© Reuters. FILE PHOTO: A worker is reflected in a wall of the Reserve Bank of Australia (RBA) head office in central Sydney, Australia, March 1, 2016. REUTERS/David Gray/File Photo

By Vivek Mishra

BENGALURU (Reuters) – The Reserve Bank of Australia will raise interest rates for the first time in more than a decade on Tuesday and join a long list of central banks now expected to tighten policy at a much faster pace than previously thought, a Reuters poll found.

A surge in inflation to the fastest annual pace in two decades last quarter led economists to rethink the policies of the RBA. They now forecast an interest rate rise just before a federal election for the first time since 2007.

The median forecast in the April 27-29 Reuters poll of 32 economists showed the RBA would raise its official cash rate by 15 basis points to 0.25% from a record low 0.10% at its May 3 meeting.

Half of 32 economists forecast a rise in the cash rate to 0.25% at the meeting and four predicted a hefty 40 basis points increase to 0.50%. The remaining 12 respondents expected no change.

That was an abrupt change in expectations from a survey taken early this month, when most economists predicted the interest rate rise to come next quarter.

“Now that the rate-hike genie looks as if it is out of the bottle, there are good reasons for the RBA to front load the tightening that is inevitably coming,” said Robert Carnell, regional head of research for the Asia-Pacific at ING.

“All the hurdles the RBA has previously placed in front of any rate hikes are arguably already met. The RBA has been gradually making room for itself to tighten in the coming months. But much higher-than-expected inflation in 1Q22 means a May hike is in the frame.”

Economists in the poll also expected the RBA to pick up the tightening pace. Over two-thirds of the economists – 23 of 32 – forecast the RBA would raise the cash rate to 0.50% in June; four forecast it would move the rate up to 0.75% or higher by then.

Among major local banks, ANZ, NAB and Westpac are tipping a first rise of 15 basis points in May, while CBA said it would happen in June.

“We can’t rule out the RBA being more aggressive than we expect, delivering one or two 50-basis-points rate increases early on to get the cash rate target more quickly to neutral,” said David Plank, head of Australian economics at ANZ.

“This could come in August, when it updates its forecasts, or even at the June meeting after the RBA sees the details of the labour cost data.”

Median forecasts showed the benchmark rate would rise to 1.00% by end-September and to 1.50% by year-end, double the 0.75% predicted in the previous survey.

Of 25 respondents who had forecasts as far as the end of next year, 19 saw the cash rate hitting 2.00% or higher.

That aggressive outlook in part reflects what other major central banks are forecast to do, especially the U.S. Federal Reserve, which is expected to raise interest rates by 50 basis points in May and again in June.

If the RBA acts, it will burden local borrowers who are already strained by record levels of mortgage debt and rising living costs, a major issue for Prime Minister Scott Morrison as he campaigns for re-election.

When asked whether the RBA should lift interest rates before the May 21 election, 13 of 20 respondents said “yes”. The other seven said no.

“The surge in inflation clearly suggests tighter policy is warranted so delaying the first rate hike for political reasons is a mistake,” said Marcel Thieliant, a senior economist at Capital Economics.

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