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RBA makes first November rate rise call since 2010

3 minute read

The RBA has opted for a 25 basis point rate hike on Melbourne Cup Day in its first November rate rise since 2010.

The Reserve Bank of Australia (RBA) has announced another 25 basis point (bp) rate hike, taking the official interest rate to 2.85 per cent.

With inflation surprising to the upside and reaching 7.3 per cent at the end of September, the RBA was predicted by some to hike rates by another 50 bps on Tuesday in a move to normalise monetary conditions in Australia.

But the RBA instead decided to stick to the slower pace of rate hikes it kicked off last month to assess the impact and allow for monetary policy lags.

"The board has increased interest rates materially since May. This has been necessary to establish a more sustainable balance of demand and supply in the Australian economy to help return inflation to target,” governor Philip Lowe said.

The board, he noted, expects to increase interest rates further over the period ahead, and is “closely monitoring” the global economy, household spending and wage and price-setting behaviour.

“The size and timing of future interest rate increases will continue to be determined by the incoming data and the board’s assessment of the outlook for inflation and the labour market,” Dr Lowe said.

“The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that”.

This is the first November rate rise since 2010, with only seven rate rises on Melbourne Cup since 1990.

Commenting on the RBA’s announcement, Russel Chesler, head of investments and capital markets at VanEck said: “The good news is that Australian official rates are unlikely to rise as much as US rates; our inflation rate isn’t as high as that in the US and wages growth isn’t nearly as strong,” Mr Chesler said.

Scott Solomon, associate portfolio manager at T.Rowe Price, predicted the bank’s 25 bp move, noting on Tuesday morning that a move by 50 bps would have meant a sharp U-turn in thinking from the bank.

“Governor Lowe is intent on allowing effects from prior hikes to flow through to main street. He’s acutely aware that many mortgages are due to reset over the next couple of months and doesn’t want to unnecessarily burden the population,” Mr Solomon said.

“Furthermore, he’s quite proud of the levels of employment reached by the Australian economy and has zero desire to prematurely destroy that,” he added.

Similarly, while recognising the high pressure on the RBA, AMP chief economist, Dr 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 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. 

The RBA on Tuesday upped its inflation expectations. It now expects inflation to peak at around 8 per cent later this year, up from the 7.75 per cent it cited last month.