(Bloomberg) -- Money market traders see an increasing likelihood of Australia’s central bank following the Federal Reserve with a 75-basis-point interest rate hike in July or August.
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Overnight index swaps now price a better than 50% chance of such a move on either July 5 or Aug. 2, as pricing ramps up ahead of minutes due Tuesday from the Reserve Bank’s June meeting.
The RBA surprised investors then with a 50 basis points increase after it was caught out for underestimating inflation. It’s further behind the curve than peers like the Fed and money markets wagers point to hikes every month for the rest of the year.
“I think that’s a reasonable central expectation,” Richard Yetsenga, chief economist for Australia & New Zealand Banking Group Ltd, told Bloomberg Television. “We’ll find out this week in the minutes with that 50-point-hike recently whether they discussed anything larger than that.”
Ahead of the minutes due at 11.30 a.m. Sydney time, investors will also hear from Governor Philip Lowe when he gives a speech entitled “Inflation and Monetary Policy.”
Lowe said last week that the RBA would do “what’s necessary” to bring inflation down to the 2-3% target and that it’s “reasonable” to expect the policy rate will rise to 2.5% from 0.85% now.
Quarterly inflation hit 5.1% in the three months through March versus a year earlier.
There is “a strong view” that the RBA has a lot of catching up to do, said Su-Lin Ong, head of Australian economic and fixed-income strategy at Royal Bank of Canada, who spent most of last week in Southeast Asia visiting asset managers, macro funds and bank treasuries.
“The current 0.85% remains very easy and a long way from neutral,” she said. “The upside risk to inflation suggests the need to get to neutral sooner rather than later.”
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