The Reserve Bank of Australia is due to consider whether to continue to hike interest rates to combat inflation.
But after the announcement that the consumer price index (CPI) had risen by 7.3 per cent in the past year, some are proposing that another supersize 50 basis point (bp) hike is warranted in November.
While Commonwealth Bank (CBA), NAB, and ANZ all anticipate two 25 basis point hikes at the RBA’s two upcoming meetings, the last two for this year, Westpac has made a fairly shocking prediction — that rates would rise to 3.1 per cent this week.
“The September quarter inflation report has come as such a major surprise that we think the Reserve Bank board will decide to raise the cash rate by 50 bps at the next board meeting on November 1,” said Westpac’s chief economist Bill Evans.
Citing evidence that pricing power is becoming widespread across expenditure items, Mr Evans said, “the best way for the central bank to break this nexus is to adopt strong rhetoric and strong action”.
To back up his theory, he referenced last week’s budget papers which raised prospect of a 50 per cent or more increase in electricity prices in 2023.
“The board should also be concerned about the unusual nature of this cycle as the economy emerges from the pandemic,” Mr Evans said.
Moreover, he noted that having announced a lower-than-expected 25 bp increase at the October meeting, the RBA now has “ample justification” for speeding up the pace of increases again in response to a significant upside shock to the inflation outlook.
But while most economists agreed that rates will go up again on Melbourne Cup Day, a majority oppose Mr Evan’s doom and gloom scenario.
The CBA believes the RBA will deliver one or two more 25 bp rate hikes, then pause for an extended period. The bank did, however, acknowledge a non-trivial risk the RBA could opt for a larger 50 bp hike.
“Ahead of the October board meeting we had ascribed a 60 per cent chance to a 25 bp hike and a 40 per cent chance to a 50 bp hike,” CBA said last week.
Similarly, while recognising the high pressure on the RBA, AMP chief economist Shane Oliver told InvestorDaily last week that “common sense” would suggest the bank will deliver another 25 bp lift.
“Inflation is a lagging indicator and, with the economy set to slow quite substantially, doing a 0.5 [hike] and aggressively raising rates after that just adds to the risks in the economy,” Dr Oliver said.
Last week, the Australian Bureau of Statistics (ABS) revealed a 1.8 per cent rise in CPI during the September quarter, taking annual growth to 7.3 per cent — the highest since 1990.
