Inflation Fears Set to Upend Swap Traders Betting on RBA Pause

Traders expecting Australia’s central bank to stop raising interest rates next month, and then cut from July, may end up being disappointed.

(Bloomberg) — Traders expecting Australia’s central bank to stop raising interest rates next month, and then cut from July, may end up being disappointed.

Swaps covering the Reserve Bank of Australia’s July meeting now signal about a 50% chance of a rate cut, an about-face from two weeks ago when they were still expecting another hike by then. The nation’s three-year bond yield has tumbled to more than 70 basis points below the RBA’s benchmark, the most in a decade, in a bet rates will be lower by the time the securities mature.

Bets on easing have accelerated as turmoil in the banking sectors in the US and Europe fueled speculation that central banks will call a halt to their hiking cycles to bolster financial stability. Federal Reserve Chair Jerome Powell said last week the policy committee considered a pause due to the banking turmoil, before tightening again to tackle inflation.

“Markets, at least in the context of Australia, have gotten carried away in their push for easing,” said Philip McNicholas, Asia sovereign strategist at Robeco Group in Singapore. “Given the limited direct spillovers to Aussie banks and RBA’s singular focus on inflation targeting, it seems hard to extrapolate that they too will do such an aggressive turn in policy rhetoric.”

Australia’s inflation rate probably held above 7% for a fourth month in February from a year earlier, according to a Bloomberg survey of economists before the data is published Wednesday. That compares with an average rate of just 1.7% in the five years through the end of 2021. 

Four Pieces

RBA Governor Philip Lowe has flagged the importance of this week’s CPI print, saying the board will look at four pieces of data, including the February inflation and retail-sales numbers, before deciding on whether or not to stop tightening. 

The Fed meanwhile pushed ahead with its ninth-straight rate increase last week, shrugging off concern that the collapse of lenders such as Silicon Valley Bank and Credit Suisse Group AG would endanger the global economic outlook.

“If the Fed had gone on hold, I think absolutely you could make a case for the RBA doing it,” said Kerry Craig, a global market strategist at JPMorgan Asset Management in Melbourne. However, inflation data is unlikely to be materially weak, a slowdown in growth isn’t pointing to a recession and the housing market looks to be stabilizing, so “it’s difficult for the RBA to pause in that environment,” he said.

Read More: Australia Puts Policy Pause Back on Table as Economy Slows

The increasing uncertainty confronting the RBA can be seen in how it has shifted its forward guidance from dovish to hawkish and then back to dovish again within the past three meetings. Taking everything into account, it probably won’t take much of an upside surprise in this week’s inflation numbers for it to decide one more hike may be the right thing to do. 

Here are the key Asian economic data due this week:

  • Tuesday: Australia retail sales
  • Wednesday: Australia inflation; Bank of Thailand rate decision
  • Thursday: NZ building permits, business confidence
  • Friday: NZ consumer confidence; South Korea, Japan industrial production; Japanese retail sales and Tokyo CPI; China and Taiwan PMIs; Thailand current-account balance

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