Economy

Not to doomspell, but: Citi see “non-trivial” risk of RBA 50bps rise on Feb 7

Fri 03 Feb 23, 1:28pm (AEST)
RBA - Reserve Bank of Australia name on black granite wall in Sydney Australia
Source: iStock

Key Points

  • The Reserve Bank of Australia (RBA) could raise interest rates by 50bps next Tuesday, Citigroup says
  • Citi expects a 25bps rise but notes there is potential for a stronger response
  • The news will likely be unwelcome for mortgage holders facing a 2023 of higher payments

In a research note released by Citi on Friday, the international investment bank outlined its case for a possible 50bps rise by the RBA at its next meeting on Tuesday 7 February 2023. 

While the bank expects a 25bps rise in line with current expectations, it does believe the RBA will need to increase its inflation expectations.

“Next Tuesday’s RBA Board meeting should conclude with +25bps to the cash rate target to 3.35% and guidance of further interest rates rises," Citi analysts Josh Williamson and Faraz Syed wrote. 

50bps rises seen in UK, EU overnight 

“Supporting this view will be a need to increase the Bank’s CPI forecasts, which is unlikely to be compatible with a shift to neutral guidance.” 

“On balance, we believe risks are tilted to the hawkish side. There is a non-trivial likelihood of a 50bp increase.” 

On Thursday, the Bank of England and its EU counterpart both raised rates by 50bps, something noted in Friday’s Morning Wrap

Don’t hope for a rate pause yet 

Citi predicts the RBA to retain in its policy statement its own board’s expectation that further rate rises will be likely. 

Should that sentence be removed from the statement, Williamson and Syed note, the market will likely interpret its removal as evidence of an upcoming pause. 

The experts at Citi aren’t so sure. 

“The probability of removing this sentence remains low. The net-balance of economic data since the last Board meeting does not support a change in policy guidance.” 

Citi raises inflation forecasts 

Part of the thesis is due to Citi raising its own Australian inflation forecasts. It expects the RBA to do the same. 

Williamson and Syed highlighted a statement from RBA Head of Economic Analysis Dr Marion Kohler at a Senate Select Committee on the Cost of Living hearing on Tuesday. 

“Kohler [said] inflation likely peaked in Q4 last year. We concur, but expect the RBA to lift the inflation forecasts to June 2024.” 

Citigroup is expecting that inflation in Australia is set to stay higher for longer than what some forecasts currently predict. 

When Australia will see deflation really flow through to the economy, and whether or not Australia will enter a recession, remains a hot topic in finance-minded discussion circles everywhere. 

ABS data shows Oz inflation is still rising (source: TradingEconomics)
ABS data shows Oz inflation is still rising (source: TradingEconomics)

 

Written By

Jonathon Davidson

Finance Writer

Jonathon is a journalism graduate and avid market watcher with exposure to governance, NGO and mining environments. He was most recently hired as an oil and gas specialist for a trade publication.

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