BREAKINGVIEWS-Aussie rate hike delivers first-mover advantage

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Antony Currie

MELBOURNE, March 17 (Reuters Breakingviews) - Michele Bullock, governor of the Reserve Bank of Australia, can be forgiven if she doesn't know the old northern England saying, "when in doubt, do nowt". But its message is one any central banker would understand: when confronted by short-term shocks that muddy economic signals, like the surge in fuel prices caused by the U.S.-Israeli strikes on Iran, avoid knee-jerk reactions. The RBA's decision on Tuesday to hike interest rates by 25 basis points adheres to that maxim much more than it may appear at first glance.

For one, the Australian economy was already running a bit too hot. After rising in the second half of last year, inflation in the 12 months to the end of January was 3.8%, with core at 3.4% - both well above the RBA's target of 2% to 3%. That had already prompted Bullock and her board to bump up rates by 25 basis points at the start of last month. With private demand strong in recent months, speculators in the financial markets had priced in at least one, if not two, more hikes this year.

Fear of rate increases had already taken steam out of some parts of the consumer economy: household spending on most goods in January was slightly weaker than expected, as pointed out by economists at Citi led by Josh Williamson. Making mortgages more expensive, on top of the hit from filling up at the pumps, sends a strong signal that the RBA intends to get ahead of this latest bout of inflation, unlike the slower reaction to rising prices in 2021 and 2022 under Bullock's predecessor Philip Lowe.

There's a silver lining for the economy Down Under from increasing the cost of borrowing: it bolsters the currency. The Australian dollar recently strengthened to a four-year high against the U.S. dollar. Expectations of rate hikes have boosted its relative returns, especially with most other central banks, including the Federal Reserve and the European Central Bank, expected to keep borrowing costs unchanged this week.

A stronger exchange rate is quite a boon at the moment, since it makes imported goods less expensive, not least the 90% of its petrol and diesel needs that Australia buys from abroad. Also, the timing of the move is right: while ratesetters should theoretically look through one-off spikes in prices, the RBA's peers have been equally scarred by the experience of four years ago and will probably start tightening monetary policy soon as well, unless the conflict in the Middle East ebbs quickly.

That'll give precious little comfort to borrowers and drivers. But it could mean Australia has delivered itself a first-mover advantage on tackling inflation.

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CONTEXT NEWS

The Reserve Bank of Australia on March 17 increased the country’s key interest rate by 25 basis points to 4.1%. It follows a hike by the same amount after the central bank’s monetary policy board last met on February 3. Five of the nine board members voted for the hike.

Australian trimmed mean inflation – which excludes very volatile items – was running at 3.4% in the 12 months to the end of January, a 10-basis-point increase from the previous figure. Headline inflation over the same period was 3.8%, above the RBA’s band of 2% to 3%.

Interest-rate decisions are due from the U.S. Federal Reserve and the Bank of Canada on March 18, and from the European Central Bank and the Bank of England on March 19. Derivatives markets suggest that all four will keep rates at current levels this week. Before the U.S. and Israel attacked Iran on February 28, they were pricing in rate cuts by the BoE, which is now seen potentially raising them by the end of the year. Rate expectations for the other central banks have also been repriced upwards.

(Editing by Jon Sindreu; Production by Oliver Taslic)

((For previous columns by the author, Reuters customers can click on CURRIE/antony.currie@thomsonreuters.com))