Economists and markets have sharpened their expectations of aggressive tightening cycles by the Federal Reserve and RBA to control rampant inflation.
Investors have ratcheted up forecasts for Australian interest rates after a warning from Reserve Bank governor Philip Lowe that inflation would reach 7 per cent this year, requiring decisive action from the central bank.
Financial markets now expect the cash rate to reach 4 per cent by early next year and 4.2 per cent by May. Two days ago, the implied peak rate was 3.8 per cent. It was not expected to arrive before early 2024.Economists from Goldman Sachs were among those on Wednesday morning who cited Dr Lowe’s comments as the reason their July meeting prediction rose from 25 basis points to 50 basis points
“We view the balance of risks to our revised forecast as skewed to the hawkish side and note that larger 75-basis-point rate increases over the coming months cannot be ruled out.”Economists at JPMorgan also revised their expectations on Wednesday for an increase at the July meeting of 50 basis points from 25 basis points, citing “Lowe’s increased confidence” to quickly lift rates.
Australian bonds extended their falls after the Fair Work Commission raised the minimum wage by a larger-than-expected 5.2 per cent from July. Goldman viewed the article as a hint from the Federal Reserve’s leadership that a jumbo rate rise is on the cards this week. Markets are now fully pricing in a 75-basis-point increase for June. This pricing indicates a strong likelihood of a similar move in July, but lower odds of such an increase in September.
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