RBA is prepared for one last powerful rate hike before slowing down

In an effort to tackle inflation without suppressing economic growth, the Reserve Bank of Australia (RBA) is rallying traders and economists, anticipating an imminent interest rate hike at Tuesday's policy meeting.

On October 4, the Reserve Bank of Australia (RBA) raised the interest rate by 0.5%, this happens for the fifth time in a row. According to economists surveyed by Bloomberg, the RBA intends to bring the rate to 2.85%, and then reduce the amount of increase. The same can be said of the money markets. RBA chairman Philip Lowe is thought to be showing signals of a further intention to cut the interest rate by a quarter.

Julia Speckia, macro strategist at UBS Group AG, believes this will be a challenge. She also noted that default on obligations primarily hits the currency and increases inflationary pressure. Moreover, she emphasized that there is no opportunity to behave like the U.S. does, since Australian mortgage rates are not as fixed as U.S. mortgage rates.

Most standard U.S. mortgages are fixed-rate, with terms of 30 years. Australian mortgages, on the other hand, aren’t known for their fixed rates. It’s estimated that up to 60 percent of Australian mortgages will have floating interest rates. At the same time, such a policy makes rate changes more effective.

However, such a sharp raise of interest rates caused the dollar to rise just as sharply and made other currencies fall. Over the past 3 weeks, the Australian dollar has fallen 5% against the U.S. dollar.

That’s why investors are not very surprised by the "dovish" signals that Lowe gives.

James Wilson, senior portfolio manager at Jamieson Coote Bonds, believes Australian government bonds to be the best in the world at the current moment as the RBA tries to slow the pace of increases combined with the commodity-exporting nation's stronger-than-expected financial position.

According to the overnight indexed swap, the rate is expected to reach 4.1% by April next year. Economists, on the other hand, talk about a peak of 3.35%. This can be compared to 4.2% for the Fed and 3.75% for New Zealand and Canada.

Andrew Ticehurst, a strategist at Nomura Holdings, believes that there is still a chance of increasing the rate by half a percent, if it happens, then the accompanying statement is likely to be softer than that of the Fed or the Bank of New Zealand. Ticehurst also noted that they don’t rely on RBA guidance when predicting the rate.

Such a harsh assessment of the RBA's guidance, may be a result of Lowe's last year mistakes.

Soon, the RBA is awaiting a government review. It’s worth noting that a recent internal examination showed the inability to adequately get out of yield-curve control in 2021.

Thus, according to financial experts, it will take a long time for investors to trust the RBA again.