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RBA to hike rates by 50 bps in October, peak rate pushed higher - Reuters poll

FILE PHOTO: Pedestrians walk past the Reserve Bank of Australia building in central Sydney, Australia

By Shaloo Shrivastava

BENGALURU (Reuters) - Australia's central bank will hike interest rates by another half-point on Tuesday and increase borrowing costs further than previously thought in its most aggressive tightening cycle since the 1990s to arrest red hot inflation, a Reuters poll showed.

At the August meeting, Reserve Bank of Australia (RBA) Governor Philip Lowe tempered guidance on further hikes as they were approaching the estimated neutral level of 2.50%, a level that neither stimulates nor restricts economic activity.

But with the U.S. Federal Reserve raising rates by 75 basis points last week and expected to take borrowing costs higher than previously expected many central banks are likely to follow suit to prevent their currencies from weakening further against the U.S. dollar.

The Australian dollar, down over 12% for the year, touched its lowest level in two years on Wednesday.

Over a 70% majority of economists, 21 of 29, in the Sept. 26-29 Reuters poll predicted the RBA would hike its cash rate by half a point to 2.85% at its Oct. 4 meeting. The remaining eight forecast a smaller 25 basis point hike.

If realized, that would mark the fifth successive 50 basis point rise, matching the fastest hiking cycle since 1994 when rates went from 4.75% to 7.50%.

"A lot of global interest rate expectations are being set in the United States," said Tony Morris, head of Australia and New Zealand economics at Bank of America.

"If the Reserve Bank doesn't maintain the current pace, then further currency weakness will feed through into a much faster pace of domestic inflation."

Although the median forecast showed rates going up another 50 basis points next quarter to peak at 3.35% there was a five way split among economists over where it would be at end-2022.

While 11 of 27 economists held the median view, one said 3.50% and two said 3.60%. Among the remaining 13 economists, ten said rates would end the year at 3.10% and three said 2.85%.

Only four of 29 economists predicted the cash rate at 3.35% by end-2022 in an August poll when the peak rate was expected to be 3.10%.

Graphics: Reuters Poll - Reserve bank of Australia inflation and monetary policy outlook - https://fingfx.thomsonreuters.com/gfx/polling/dwpkroakxvm/Reuters%20Poll-%20Reserve%20bank%20of%20Australia%20inflation%20and%20monetary%20policy%20outlook.PNG

With inflation at a 21-year high of 6.1%, more than twice the RBA's target range of 2%-3% and forecast to stay about above that until early 2024, peak interest rate could be revised up again.

Indeed, 11 of 25, or 44%, of analysts expected rates to go higher than the current expected peak of 3.35% by the end of Q1 2023.

The survey showed inflation averaging 7.0% this quarter and then peaking at 7.5% in the next. Across 2023 it was predicted to average 4.5% and then fall to 2.7% in 2024.

A new official monthly measure of Australian consumer prices on Thursday showed annual inflation eased slightly to 6.8% in August from 7.0% in July.

"Our expectation is conditional on several factors such as medium-term inflation expectations remaining well anchored, a sustainable pick up in wage growth and easing global inflationary pressures," said Jameson Coombs, economist at St. George Bank.

"If upside risks to inflation materialised, the RBA Board may need to go beyond our expectation for the terminal rate."

Australia's economic growth was predicted to average 4.0% for this year and then halve to 2.0% in 2023 and 2024.

(For other stories from the Reuters global long-term economic outlook polls package:)

(Reporting by Shaloo Shrivastava; polling by Devayani Sathyan & Anant Chandak; analysis by Arsh Mogre, Editing by William Maclean)