The Reserve Bank of Australia (RBA) is expected to resume its monetary policy tightening cycle at its upcoming board meeting on Melbourne Cup Day (Tuesday, 7 November).
Markets are pricing in a 25 bps hike, which would take the official cash rate to 4.35 per cent and the cumulative size of its tightening to 425 bps since the cycle commenced in May 2022.
This follows an upside surprise in the latest quarterly consumer price index, with both headline and trimmed mean inflation rising 1.2 per cent – well beyond consensus expectations.
The RBA’s own language has also shifted, with its last statement of monetary policy referencing a “low tolerance” for slower progress to the 2–3 per cent inflation target.
RBA governor Michele Bullock has also repeatedly stressed the central bank’s readiness to lift rates higher in response to a “material” reacceleration in inflationary pressures.
HSBC chief economist Paul Bloxham observed: “The past month has seen more evidence that although inflation is falling, it may not be falling fast enough.
“At the same time, although the jobs market is loosening, it, too, may not be loosening fast enough.
“Overall, the economy is headed in the right direction for the RBA to achieve its inflation mandate, but it does not appear to be moving in that direction as fast as the central bank had been forecasting.”
Scott Solomon, co-portfolio manager of T. Rowe Price’s Dynamic Global Bond Strategies, said while he anticipates a hike in November, it may be less pronounced than previous actions.
“… Given a recent strong inflation print, the minutes of the prior meeting showing a surprising balance between a hike and a no hike decision. In addition, the recent easing of financial conditions post the Fed’s dovish pause, the calculus is tipped in favour of a hike,” he said.
“Governor Bullock will likely try to pitch the decision as largely precautionary in nature. In fact, I think it would be a nice opportunity to hike 15 bps and bring the terminal rate to a more traditional 4.25 per cent.
“It is unlikely they do that – but the RBA is no stranger to surprises and would check a lot of boxes.”
Beyond November, markets are split on whether the RBA would action further hikes to the cash rate and on the timing of interest rate relief.
The central bank’s next statement on monetary policy, however, is set to offer some clarity with updated RBA forecasts for inflation and other key economic indicators.
According to Mr Bloxham, a November hike may not be the last of this tightening cycle.
“We think that the RBA will be in less of a hurry to deliver any subsequent moves than when the cash rate was well below neutral,” he said.
“We see a follow-up move in December as unlikely, but that by February 2024 another cash rate hike could be in play.”
As for the timing of rate relief, ANZ Research does not expect the RBA to reverse its monetary policy strategy until the second half of 2024.
“The risks for the outlook are towards sticky inflation rather than a concerning drop in activity,” ANZ Research noted.
Other economists, like AMP chief economist Shane Oliver and Commonwealth Bank’s head of Australian economics Gareth Aird, expect rate relief in mid-2024.
The Commonwealth Bank is anticipating cumulative easing of 100 bps by the end of next year.