Financial markets are pricing in an 80% chance that the Reserve Bank of Australia (RBA) will raise interest rates for the third consecutive time at its meeting on Tuesday. The move comes despite the fact that the latest surge in inflation is largely driven by rising oil prices linked to Middle East tensions, which are beyond the reach of monetary policy.
Official figures released last week showed annual inflation jumped to 4.6% in March, its highest in two and a half years. However, a more than 30% spike in petrol prices accounted for most of the monthly increase, raising questions about the effectiveness of rate hikes in addressing the root cause of inflation.
Phil O'Donaghoe, chief economist at Deutsche Bank, acknowledged the frustration of mortgage holders, noting that monetary policy can do nothing about oil-driven inflation in the next six months. Nonetheless, he argued that a rate hike is necessary to demonstrate the RBA's commitment to its inflation target and to influence price and wage setters.
Robert Thompson, a macro strategist at RBC Capital Markets, said the RBA cannot address the global oil supply shock but must act because inflation was already uncomfortably high before the recent escalation in the Middle East. He expects the board to vote more decisively than in March, when the decision to hike passed by a five-to-four majority.
Johnathan McMenamin, senior economist at Barrenjoey, warned that the RBA cannot afford to do nothing, as inflation would eventually self-correct by damaging real incomes and living standards. He said the central bank's job is to maintain inflation expectations and smooth the economic cycle, with the option to cut rates later if demand is overly suppressed.
