Australian Dollar: RBA may follow hawkish market pricing – Commerzbank

Commerzbank’s analyst Volkmar Baur anticipates the Reserve Bank of Australia (RBA) will follow market pricing and raise interest rates next week, contrary to initial expectations of no further tightening. Inflation remains above target, partially driven by fuel costs, but domestic indicators and housing are weakening. Baur questions the rationale for tightening, yet believes the RBA will follow market expectations.

Prior to this, the central bank was not expected to raise rates any further. Despite economic arguments suggesting otherwise, the market now expects a 90% probability of a rate hike, with Bloomberg and other sources also predicting a hike. Members of the RBA have indicated in recent speeches that another rate increase may be necessary.

In July, inflation reached 3.5% year-over-year, but August may see a larger increase due to rising fuel prices. Official figures will be released next Wednesday, one day after the RBA meeting. However, it is assumed that the RBA already has an idea of the probable outcome. While arguments for a rate hike include high inflation, sentiment indicators like the Purchasing Managers' Index indicate an economic slowdown, and unemployment has risen to 4.6%, the highest in nearly five years.

Additionally, the real estate market has sharply declined, especially in major cities like Sydney and Melbourne. Although inflation is a concern, a rate hike won't address global fuel prices, and the broader economic momentum does not strongly support further rate hikes. The market is convinced of this, although Baur does not fully agree based on fundamental data. However, the RBA is likely to align with market expectations on Tuesday.