Economists at the Commonwealth Bank have maintained their forecast that the Reserve Bank will lift interest rates by 25 bps at its upcoming meeting on Tuesday (4 October).
This puts Australia’s largest bank out of step with Westpac, NAB and ANZ, as well as current market pricing, which all point to a 50-bp increase to the cash rate.
However, CBA has acknowledged that the RBA’s decision will likely be a “line-ball call” and puts the odds of a 25-bp hike at 60 per cent and a 50-bp hike at 40 per cent.
“The actions of many other central banks globally lends weight to the RBA opting for another 50bp hike,” said CBA head of Australian economics Gareth Aird.
“But we believe the domestic backdrop does not warrant another super-sized rate hike, particularly given the RBA has recently acknowledged that, ‘the full effects of higher interest rates [are] yet to be felt in mortgage payments’.”
According to the bank, there is a strong case for the RBA to slow the pace of monetary tightening at its October board meeting with a “business as usual” rate rise of 25 bps.
CBA suggested that the RBA has already made the case to begin slowing, with recent statements recognising that monetary policy works with a lag and that it will take time for data to reflect the rate hikes that have already been handed down.
While a recent upside surprise in US inflation data saw market pricing for the RBA’s October decision shift in favour of a 50-bp rate hike, Mr Aird said that markets appeared to have already dismissed earlier comments made by RBA governor Philip Lowe.
During a speech in September, Dr Lowe said: “Our monetary policy is going to be determined by Australian-specific conditions — labour market dynamics in Australia are very different to what they are in the US and the UK.”
While the US Federal Reserve, Bank of England and other central banks have committed to fighting inflation, even at the cost of growth, deputy governor Michele Bullock has highlighted that the levels of inflation currently seen in Australia are lower than those seen elsewhere.
Another factor in the CBA’s October rate call is the higher frequency of the RBA’s meeting, which it said reduces the need to deliver a large hike at any single meeting.
“The RBA may well deliver another 50bp rate hike at the October Board meeting. And it would not surprise us if they did. But we believe the case to slow to 25bp rate hikes from here is strong and we stick with that call as the base case next week,” Mr Aird concluded.
Other major banks weigh in
Westpac chief economist Bill Evans noted that global interest rates have increased significantly since the RBA’s last board meeting on 6 September.
He said that, while the bank has strongly argued that the RBA should slow the pace of rate increases once it has reached a neutral setting, there is uncertainty about whether the current interest rate, 2.35 per cent, is close enough to neutral to justify scaling back.
“The governor and deputy governor have opined on several occasions that real neutral is at least zero and using long run measures of inflationary expectations as a guide to the nominal component (2.5 per cent) then neutral is at least 2.5 per cent,” he said.
“Given this view and in light of the rise in global rates, it seems sensible to push the cash rate to 2.85 per cent in October, taking it comfortably above the neutral benchmark before scaling back the pace of rate increases.”
Economists at ANZ have predicted that the strength of the domestic economy and the persistence of global inflation pressures would likely outweigh recent market turmoil following the UK’s mini-budget and heightened fears of a global recession.
“We expect a 50bp rate hike from the RBA at its October meeting on Tuesday, reflecting strength in recent domestic data, including solid household spending, ongoing inflation momentum and near-record job vacancies,” the bank’s economists said.
NAB economists have also confirmed they are expecting a lift of 50 bps will be announced.
Meanwhile, HSBC has outlined a similar view to that of CBA, with a central case of a 25-bp increase and a “high risk” of a 50-bp hike if the RBA deems inflation to be too concerning.
“The RBA could choose to ‘follow the Fed’ (and ECB) and keep delivering ‘super-sized’ hikes,” HSBC chief economist Paul Bloxham and economist Jamie Culling said.
“However, if the domestic circumstances are different, the RBA does not need to blindly follow. Indeed, the point of having a floating exchange rate is to be able to have monetary policy settings that are independent and based on local conditions.”
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.