This comes off the back of an inflation surprise in the December quarter, which saw both quarterly and annual figures lift 1.9% and 7.8% respectively. 

RBA Head of Economic Analysis Department Marion Kohler believes despite December’s results, inflation has now peaked. 

“(We) think the peak in inflation was at the end of 2022 – at around 8% – and that inflation will begin to ease over the course of this year,” Dr Kohler said. 

Aside from the slated January pause to coincide with the RBA not meeting for the month, another increase in February would mark the ninth consecutive cash rate increase. 

AMP Chief Economist Shane Oliver noted another 0.25% increase to the cash rate in February to 3.35% may be the peak.

“The RBA is likely to want to reinforce its inflation fighting credentials again to keep inflation expectations down particularly given the risks of wages breakout,” Dr Oliver said. 

“As a result of this, coming on the back of still strong retail sales we now expect the RBA to raise its cash rate again by another 0.25% at its February meeting.”

Is the RBA waiting for other central banks to pump the brakes first?

In a sign of things to come for the RBA, Dr Oliver noted that the US Fed and the Bank of Canada also hiked their cash rate by 0.25%, before signaling a pause is to come.

On Thursday morning Australian time, the US Fed hiked its policy rate by 25 basis points to an upper-band of 4.75% - the highest point since October 2007 right before the Global Financial Crisis.

In its December minutes following its policy meeting, the RBA detailed the board had considered the options of a 50 basis point increase, a 25 basis point increase, or a pause in the cash rate.

While some had indicated the RBA may pause in December, the minutes indicated that the RBA is set on acting consistently.

Further, the minutes detailed that RBA board members noted no other central bank had yet paused - presenting the question of why should the RBA?

CommBank Head of Australian Economics Gareth Aird said that picture has since changed. 

“The Norges Bank (Bank of Norway) kept monetary policy unchanged in January and the Bank of Canada stated an intention to keep the policy rate at its current level following a 25 basis point rate rise in January,” Mr Aird said. 

Westpac Chief Economist Bill Evans said despite the fact that the Board considered the pause option, the minutes do not paint the board in a dovish light.

“When the Board comes to consider its options at the next meeting in February it will have the December quarter Inflation Report but will also be observing data for the holiday period that may be holding up better than expected,” Mr Evans said.

“Based on the analysis in the minutes, that will set the scene for hikes in both February and March while the May meeting will also be confronted with uncomfortably high inflation for the March quarter and a central bank that is observing tight labor markets and rising wages pressures.” 

Mr Evans said December quarter wages data published in March will be an important yardstick for the RBA.

Westpac economists anticipate 25 basis point increase

Westpac economists anticipate the RBA to stick to the trend, increasing the cash rate by another 25 basis points in February.

“We expect it is highly likely that the Board will decide to raise the cash rate by 25 basis points while maintaining the guidance used in December for the next meeting on March 7,” Mr Evans said.

“The disturbing inflation report is likely to be the key driver of the decision to raise the cash rate in February.”

CommBank economists forecast 25 basis point increase despite options on the table

CommBank Head of Australian Economics Gareth Aird noted the consensus of economists expect the RBA to raise the cash rate by 25 basis points at the February Board meeting. 

“The RBA maintained a hiking bias at the December Board meeting and we expect them to deliver on that bias at the February Board meeting,” Mr Aird said. 

“At the December 2022 Board meeting three options for the cash rate decision were considered. This was the first time that no change in the cash rate was considered since the tightening cycle commenced in May.

“Our base case is that they hike the cash rate by 25 basis points next week, but we think the case to raise the cash rate by 40 basis points to a conventional metric of 3.50%, coupled with a stated intention to hold the policy rate steady over the period ahead will be on the table."

ANZ economists tip a 25 basis point increase

ANZ Senior Economist Catherine Birch said the lastest inflation data published by the ABS showed that momentum continued to build in domestically driven inflation pressures in the December quarter. 

“This cements a 25 basis point cash rate hike in February and supports our view of another 25 basis point hike in March, especially if we see a solid print for December wages in mid-February as expected,” Ms Birch said.

NAB economists remain on trend forecasting 25 basis point increase

NAB Economist Taylor Nugent detailed that if the RBA can’t forecast inflation back in the band even at that horizon, it would plant the risk for a cash rate peak towards 4%. 

“NAB sees the cash rate increasing by 25 basis points in February and March to a peak of 3.6%,” Mr Nugent said. 

“The assumed cash rate path is likely to be similar to November, which had a peak of around 3½% in mid-2023 and 3% by end 2024.”


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