Summary:

The Federal Reserve of Australia has clearly stated that it will further raise interest rates in the future;

I expect the next quarter's interest rate hike to be in March;

I now expect to further raise interest rates by a quarter percentage point in May;

I don't think a cash interest rate of 3.85% will lead to a sharp decline in the economy;

But we cannot determine how the economy will react as interest rates rise.

Updated cash rate view

Before the February meeting, I reached a consensus. Interest rates will be raised in February and will be raised again in the next few board meetings (I believe in April).

However, the statement after the meeting was more radical than I (or most others) had anticipated regarding the possibility of interest rate hikes. The fourth quarter inflation data will be a key factor in the RBA's change of view, although optimism about the short-term global economic outlook may have played a role. Recognizing the change in tone after the meeting, I have advanced my forecast for the next interest rate hike to March. I will keep the peak cash interest rate at 3.6%. However, the financial market has gone further, shifting from pricing an additional 25 basis points hike to pricing an additional three 25 basis points hike.

The Federal Reserve of Australia subsequently issued a Monetary Policy Statement (MPS), which provided more details about its predictions. The Ministry of Public Security has not clearly explained (at least to me) why the Australian Federal Reserve has become more aggressive. A better suggestion comes from the Governor's testimony in the Senate, when he pointed out that the significant price increase in some CPI (such as travel) was mainly attributed to strong demand.

I'm not sure if this is correct. For example, the significant increase in air ticket prices is attributed to very strong demand and a decrease in the number of flights. He also mentioned that Australia has not benefited from the decline in good prices like other countries such as the United States. But I think this is mainly because Australia's economic cycle lags behind other countries, as we later reopened the economy from COVID. I do agree with the Federal Reserve of Australia's view that strong demand has driven inflation up by a quarter to a third.

In both the decision and the statement after the MPS, there were very prominent sentences, 'The Australian Federal Reserve expects to further raise interest rates in the coming months...'. Note that in the plural, most market economists seem to have shifted their view of peak cash interest rates to at least 3.85% (some higher). I joined the 3.85% group. The possibility of multiple interest rate hikes mentioned above means that the probability of cash interest rates reaching a peak of 4.1% is greater than 3.6%.

I still believe that reaching a peak cash interest rate of 3.6% is enough to bring inflation back to the target level. My idea is (and still is) that the increase in cash interest rates is both large and fast enough (coupled with a reduction in supply chain issues) to bring inflation back under control. The Federal Reserve of Australia clearly believes that inflation risk is higher and believes it is necessary to raise cash interest rates.