The nine-person board of the Reserve Bank of Australia will be divided when handing down its cash rate decision on Tuesday, a leading economist has predicted.
Money markets say there is a 77 per cent chance of a hike on Tuesday after inflation spiked 3.8 per cent in the 12 months to December.
While many economists and every major Australian bank predicts the RBA will hike the cash rate 25 basis points to 3.85 per cent, some are still betting on a hold.
AMP’s Diana Mousina is amongst those, however, she noted was not overly confident of this prediction and forecasted a lack of unity amongst the board.
“It’s obviously going to be a really close call,” Ms Mousina told Business Now.
“I think the board’s going to be divided about what to do.
“At least I hope that the board is divided because that would show a lot of independence between the Reserve Bank and the independent board members.”
The RBA board has only been split once in the past 12 months and it was when the central bank delivered a shock rate hold in July last year.
Six members voted in favour of holding while three called for a 0.25 per cent cut.
AMP’s prediction of the RBA holding rates on Tuesday came as her team still believed inflation would match the central bank’s prediction.
“It’s based on the expectation that the Reserve Bank’s forecast – which it releases tomorrow on inflation – is still going to show a projection that they’re going to get inflation within the 2-3 per cent target band probably by the end of this year,” she said.
“(This) is where the forecasts were last time around.
“But … clearly the pace of inflation is running above three per cent at the moment (and) it could make the Reserve Bank feel uncomfortable.”
A rate hike could be on the cards as trimmed mean inflation – the middle 70 per cent of price changes core to the RBA’s decision – remains at 3.3 per cent while unemployment sits near historic lows.
EQ Economics managing director Warren Hogan told Sky News the RBA needs to reverse the three interest rate cuts it delivered last year – bringing the cash rate back up to 4.35 per cent.
“We need the RBA to reverse the rate cuts of last year. They were a mistake, there’s no two ways about it,” Mr Hogan said on Monday.
“And then if they can get that done by May over the next three meetings, then the governments of Australia need to tighten up fiscal policy just a little bit.
“They just need to stop spending growing.”