RBA Cash Rate Futures Indicate a 45% Probability of a 25bp Hike at August 6 Meeting

The Reserve Bank of Australia (RBA) is under increasing pressure to address soaring inflation, which has reached a 30-year peak. According to cash rate futures, there is now a 45% probability of a 25 basis point (bp) increase at the RBA’s upcoming meeting on August 6. This prediction comes amidst robust economic growth in Australia, driven by a strong labor market and heightened consumer spending.

Despite the RBA’s dovish stance in recent months, maintaining the cash rate at a historic low of 0.1% since November 2020, the recent surge in inflation to 5.1% in the June quarter—well above the RBA’s target range of 2-3%—has led market analysts to suggest that a rate hike might be necessary to prevent economic overheating.

A 25bp increase would bring the cash rate to 0.35%, still relatively low by historical standards but indicative of a shift in the RBA’s monetary policy. Such a move could significantly impact the Australian dollar and the housing market.

The upcoming RBA meeting on August 6 is expected to be closely monitored by market participants, with many anticipating a more hawkish stance from the central bank. Governor Philip Lowe has previously affirmed the RBA’s commitment to controlling inflation, suggesting that a rate hike would underscore the bank’s dedication to maintaining price stability.

The 45% probability of a rate hike is derived from data on the ASX 30-day interbank cash rate futures contract, a widely used market expectations indicator. This likelihood has increased from approximately 30% just a week ago, reflecting growing investor bets on an August rate hike.

Market analysts generally view a potential rate hike in August as a prudent response to the strong economy and the need to manage inflationary pressures. “The RBA has been slow to respond to the inflationary trends in the economy,” commented one analyst. “An August rate hike would be a positive step towards preventing overheating.”

However, some analysts caution against a hasty rate increase, suggesting that the RBA should await additional data. “Given the uncertainties in the global economy, the RBA should be cautious about raising rates too quickly,” said another analyst. “A rate hike in August might be premature, and the RBA should gather more data before making a decision.”

In summary, the 45% chance of a rate hike at the RBA’s next meeting underscores the uncertainty surrounding the Australian economy and the central bank’s monetary policy. As August 6 approaches, market participants will be keenly observing for any signs of a hawkish shift from the RBA, with significant implications for the Australian dollar and the housing market.