While the Federal Reserve and most global central banks are pivoting towards an interest rate cutting cycle, Australia may be brewing a radical policy "U-turn."
According to the latest Bloomberg report, driven by stubbornly high inflation and a robust labor market, economists widely anticipate the Reserve Bank of Australia (RBA) will raise the cash rate by 25 basis points to 3.85% this Tuesday. Overnight index swaps indicate markets are pricing in approximately a 73% probability of a 25-basis-point hike by the RBA.
This shift is significant as, less than six months ago, the bank was attempting to stimulate the economy through rate cuts. This reversal also implies Australia could become one of the few major economies opting for policy tightening at the current juncture.
The 10-year government bond yield is approaching the 5% threshold.
The reassessment of the policy path has rapidly transmitted to the bond market. Australia's 10-year government bond yield closed last week at 4.81%, spiking to 4.90% following stronger-than-expected inflation data, with several institutions forecasting it will briefly breach 5% in the coming months.
National Australia Bank (NAB) projects that if the RBA hikes in both February and May, coupled with upward pressure on global sovereign bond yields, the 10-year yield will face further room for increase.
However, some institutions believe it will be difficult to sustain levels above 5% for an extended period. Chris Manuell, a portfolio manager at Jamieson Coote Bonds, stated, "At these levels, demand from overseas investors and asset allocators will emerge."
Inflation and employment data are altering policy pricing.
The turning point in policy expectations stems from a recent series of "surprisingly strong" data points.
In the fourth quarter of last year, the core inflation metric closely watched by the RBA remained elevated, significantly above the 2%-3% target band. Concurrently, the unemployment rate, which was expected to gradually rise, unexpectedly fell to 4.1%, 0.3 percentage points lower than the central bank's forecast.
Stephen Miller, an investment strategist at GSFM, stated bluntly, "Inflation is a real and present danger, and acting now with rate hikes is the most appropriate choice. Failure to act could necessitate more aggressive policy tools in the future."
Nick Stenner, a strategist at Bank of America, also pointed out that against a backdrop of persistently above-target inflation with upside risks, "holding rates steady would raise market doubts about the central bank's commitment to combating inflation."
Global monetary policy divergence is intensifying.
The RBA's potential rate hike is occurring against a backdrop of significant divergence in global monetary policy.
The Federal Reserve and some Asian economies are seen as nearing a window for rate cuts, the Eurozone is expected to maintain a wait-and-see stance, while Japan still leans towards further tightening.
This divergence is already reflected in exchange rates. The Australian dollar has appreciated approximately 5% year-to-date, ranking it among the top performers of major currencies, viewed by the market as a "passive tightening" of financial conditions.
National Australia Bank noted that if a hike does occur this week, it is more likely to be a "hawkish insurance hike" rather than the start of a new tightening cycle.
