RBA makes Melbourne Cup Day rate call

The Reserve Bank of Australia (RBA) has actioned its 13th hike to the official cash rate since commencing its tightening cycle in May 2022, lifting the official cash rate by 25 bps to 4.35 per cent.

The November decision follows four consecutive hold verdicts in July, August, September, and October.

Markets anticipated the November hike, with all four of the big four banks projecting a 25 bps increase following an upside surprise to the September quarter consumer price index (CPI).

Both headline and trimmed mean inflation increased 1.2 per cent over the period, exceeding consensus expectations of 1.1 per cent (headline) and 1 per cent (trimmed mean).

The trimmed mean result was 0.3 percentage points above the RBA’s forecast of 0.9 per cent.

In annual terms, trimmed mean inflation eased to just 5.2 per cent (20 bps above market consensus) and headline inflation eased to 5.4 per cent (10 bps above market consensus).

The September quarter CPI data followed a shift in the Reserve Bank’s rate rhetoric, with the central bank’s last statement on monetary policy referencing a “low tolerance” for evidence of slower progress to the 2–3 per cent inflation target.

RBA governor Michele Bullock also stressed the central bank “will not hesitate” to lift the cash rate higher in response to a “material rise” to its inflation forecasts for a return to the target range by the end of 2025.

According to Luci Ellis, Westpac’s group chief economist and former assistant governor at the RBA, the CPI result confirmed fears of an inflation setback, particularly amid evidence of continued household resilience and demand pressures from rapid population growth.

“In our view, the Q3 CPI report highlighted that the pace of disinflation was not as fast as the RBA were hoping for, and the risk of a longer return to target – relative to the RBA’s current forecasts – is therefore material,” she said.

“The resilience of the household sector, alongside lingering capacity constraints amid strong population growth, supports the decision to raise rates as well.”

However, she said the November decision would be “finely balanced”, given the labour market has loosened, albeit modestly.

“The board will also recognise that the labour market has turned and the risk of a price–wage spiral is receding,” she added.

Looking ahead, markets are split on whether the RBA’s November increase capped off the tightening cycle, with some observers, like Deutsche Bank chief economist Phil O’Donaghoe, expecting a hike in December.

As for the timing of interest rate relief, Commonwealth Bank’s head of Australian economics Gareth Aird and head of investments strategy and chief economist at AMP Shane Oliver expect the RBA to commence a monetary policy easing cycle in mid-2024.

CBA is projecting cumulative cuts of up to 100 bps before the end of next year, which according to its projections, would take the cash rate to 3.35 per cent.