RBA Preview: 50 bps is not a given, it could be just 25 bps – Scotiabank

Analysts at Scotiabank lean towards a 25 bps rate hike announcement from the Reserve Bank of Australia (RBA) on Tuesday, although the depreciation of the Australian dollar against the US dollar could press the RBA to deliver a 50 bps lift-off.

Key quotes

“Minutes to the September 6th meeting ... indicated that there was discussion around both a 25bps hike and the 50bps increase they opted for which fans the impression that there may be rising appetite for slowing the pace of hikes especially given the reference to how “They acknowledged that monetary policy operates with a lag and that interest rates had been increased quite quickly and were getting closer to normal settings.”

“A few days before the release of the minutes but after the meeting itself, Governor Lowe said he hoped that the cash rate would come to rest within a 2.5–3.5% rate with ‘a few’ more rate increases over coming meetings. This suggests that there is considerably more work to be done with the 2.35% current rate below the bottom of the range.”

“The fly in the ointment is that both developments preceded the Federal Reserve’s more aggressive actions on September 21st with much of the emphasis placed upon the more hawkish dot plot.“

“The Australian dollar has been among the casualties in the face of the US dollar’s broadly based strength and has shed another couple of cents since then along a long-term declining trend from about 76 cents in April to roughly 65 cents now. This development might suggest a more pressing need for a bigger 50bps hike given the implications of ongoing currency weakening for import price pressures.”