CreditorWatch expects the Reserve Bank of Australia to raise interest rates by 25 basis points at its September board meeting, according to Chief Economist Ivan Colhoun.
Colhoun assigns a 100% probability to an increase and a 95% to 100% chance that it will be 25 basis points rather than a larger move.
He bases that view on a run of economic signals that have strengthened the case for tighter policy since the central bank left rates unchanged in August while warning of upside risks to inflation.
Those signals include stronger-than-expected second-quarter growth, a higher-than-expected July trimmed mean consumer price index reading, elevated oil prices and a labour market that remains somewhat tight. Colhoun also argues that the AI investment boom is adding to demand and inflation pressure.
Colhoun said the Bank's recent public messaging had made its stance clear. He wrote that recent inflation developments had been unfavourable, with fuel costs staying high for longer than expected and inflation expectations at risk of becoming less anchored.
In his analysis, leaving rates unchanged would be inconsistent with both the economic data and the central bank's recent communication. He put the probability of no change at 0%.
“The main question for me is not whether the RBA will raise interest rates on Tuesday. The Board has to move interest rates to address its weakened credibility and if it hopes to have any hope of lowering inflation to around 2.5% by the second half of next year, given recent unfavourable developments,” said Ivan Colhoun, Chief Economist, CreditorWatch.
While Colhoun expects a 25 basis point move, he also examined whether the Board could opt for a larger increase of 40 or 50 basis points. He put the chance of that outcome at 0% to 5%, although he said there were arguments for acting more aggressively if policymakers wanted to shift the inflation path more quickly.
His base case remains a conventional quarter-point rise because the Reserve Bank tends to use 25 basis point increments outside exceptional periods. He also cited the delayed effect of earlier increases, a slowing economy and a modest correction in house prices as reasons for a measured step.
Business pressure
The outlook carries implications across the corporate sector, especially for debt-laden businesses and households. Higher borrowing costs would add pressure to consumers and companies with heavy debt loads, even as persistent inflation continued to affect the broader economy.
Australian businesses are facing what Colhoun described as a complex mix of high costs, elevated fuel prices, the highest interest rates in many years and the AI investment boom. He said that combination is creating gains in some parts of the economy while squeezing others.
Construction, mining, technology and services linked to those sectors are among the areas identified as beneficiaries of stronger investment activity. By contrast, housing, real estate, retail and personal services are seen as more exposed because of debt sensitivity or reliance on discretionary spending.
Colhoun's analysis also raises the prospect of another move before the end of the year. He argued that the more important question is whether the Reserve Bank follows an expected September rise with a second increase before Christmas, particularly if officials judge that inflation expectations are starting to drift.
That possibility has drawn attention because the central bank has a history of changing policy settings within three months of flagging upside or downside risks. In this case, August's warning was followed by additional data and speeches from senior staff that, in Colhoun's reading, strengthened the argument for tighter settings.
He said the Bank was now less willing to tolerate further delays in getting inflation back to target, especially after a prolonged period in which inflation has stayed above target and weighed on its standing with the public and markets.
“The more interesting question is not whether the RBA will raise interest rates next week, but whether there will be a quick second interest rate rise before Xmas, as the RBA is receiving some feedback that suggests inflationary expectations are beginning to de-anchor,” said Colhoun.