Wherever your preferences may lie, the cash rate target is probably at least a bit significant for you. For some people, every rate hike is the stomach blow of increases to their mortgage repayments, while others eagerly anticipate rates going up because of the higher returns on investments like term deposits.
Will we see another rate hike?
After a hike in June, the cash rate has been kept steady at 4.10% in the past four monetary policy decisions. Many economists agree though that November’s monetary policy decision, on Melbourne Cup day, is very much live, with the likeliest outcome increasingly looking to be another 25 basis point increase.
On 24 October, RBA Governor Michele Bullock told Australia she and the board “will not hesitate” to raise the cash rate further if there is a “material upward revision to the outlook for inflation”. The very next day, quarterly CPI inflation figures came through above expectations. It was an annual increase of 5.4% comparing the September '22 quarter with September '23, and a quarterly increase of 1.2% to underlying inflation.
When subsequently questioned, Bullock refused to say whether the board considered the inflation numbers “material”, but it's been enough for several economists who had been calling a hold to change their mind. Since then, retail trade numbers for September have also been released, again stronger than expectations. Retail turnover rose 0.9% over September compared to a consensus market prediction of 0.3%, which lends further weight to a cup day rate hike.
Read more: Michele Bullock is being deliberately vague
CommBank
Just after the CPI release, CBA head of Australian economics Gareth Aird said the lift in underlying inflation was “sufficiently strong” for the RBA to act on what he calls its “hiking bias” in November.
“The RBA tends to place more weight on underlying rather than headline inflation. And their preferred measure of underlying inflation is the trimmed mean,” Mr Aird said.
“The annual rate of both headline and underlying inflation came down over quarter-three '23. But it is the quarterly pulse of underlying inflation that matters most at this juncture for monetary policy.
“The 1.2% per quarter increase in trimmed mean inflation over Q3 '23 was stronger than the upwardly revised 1.0% quarterly lift in the second quarter.”
CommBank and Mr Aird ascribed a 70% chance of a 25bps rate increase in November, and a 30% chance of a hold.
After this though, Mr Aird thinks the work of the RBA is likely done.
“A November rate hike will enable the RBA to retain its central scenario for inflation to return to the target band by late 2025,” he said.
Westpac
Up until October, Westpac Chief Economist Luci Ellis was the assistant governor of the RBA. She’s therefore very well placed to offer insight on how the RBA will view the inflation print, and like Gareth Aird, she says she’s seen enough to predict a hike.
“At 1.2% in the quarter…trimmed mean inflation was a little higher than the Westpac team expected,” she said.
“The higher [inflation] cannot be attributed solely to volatile components that will reverse out soon.
“Fuel inflation was stronger in the quarter, but so were vehicle price inflation, homebuilding cost inflation and inflation in a range of services components such as meals out and takeaway, dental fees and transport fares.”
That being said, she also says the ‘upside surprise’ in September is unlikely to carry through to subsequent quarters, and a rate hike was not entirely clear cut.
“If the RBA did not want to raise rates this month, it could upgrade its 2023 forecast for inflation, but not the forecast for 2024 and beyond.
“It could then argue that there had been no material upward revision to the outlook for inflation, only to the history.”
However, she said on the balance of probability, she didn’t think they will try to reframe the data like this.
“Waiting would be inconsistent with the clear language from the Governor’s speech this week about not hesitating if the outlook changes.”
ANZ
Adam Boyton, head of Australian economics at ANZ, was another who felt the inflation numbers were sufficiently strong to merit another hike.
“Given the hawkish rhetoric from the RBA over the [preceding] two weeks and an uncomfortably high Q3 CPI outcome, we now expect the RBA to increase the cash rate by 25bps in November to 4.35% p.a,” he said.
“We think the RBA was expecting trimmed mean [inflation] around 0.9%, based off the forecasts published in the August Statement on Monetary Policy.”
He said the most recent Financial Stability Review found households and businesses in Australia have overall, coped fairly well with the rate hikes we have seen so far, so might be able to absorb another hike without too much pain.
He also said this prediction wasn’t certain though, given wages growth has been below expectations, as well as a likely increase in productivity over the third quarter which could reassure the board of a return towards pre-Covid trends.
Mr Boyton said 4.35% “should mark the peak in the cash rate”, but said there remained the risk it could tighten further, while any rate cuts remain a long way off.
NAB
NAB economist Tapas Strickland has been consistent throughout the past few months that a November rate hike will be necessary, and hasn’t changed his mind.
“RBA Governor Bullock said the Board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation, and it is hard not to see [Q3 CPI inflation] meeting that bar,” Mr Strickland said.
“Quarterly trimmed mean came in at 1.2% quarter to quarter…that was marginally higher than our 1.1% quarter to quarter expectation…[and] is meaningfully higher than the 0.9% outcome the RBA had pencilled in the August SOMP.”
NAB still expects the cash rate will not go above 4.35%, but that there will be no cuts until September 2024.
AMP
AMP Chief Economist Shane Oliver is another who believes a rate hike is the likeliest outcome in the aftermath of the inflation figures.
“The trimmed mean underlying measure only slowed to 5.2% year on year which is significantly above the RBA’s forecast in August that it would slow to around 4.8% year on year,” he said.
“Beyond the 7.2% surge in petrol prices and the 4.2% rise in electricity prices, services inflation remains sticky evident in strong increases in rents, meals & takeaway, vet services, hairdressing and insurance.”
What do the markets suggest?
All of the above economists have credentials and experience that gives weight to their predictions. Another indicator that can be equally telling though is the behaviour of markets. You can learn a lot from the decisions of investors who are putting their money where their mouth is, standing to profit from correctly predicting interest rate movements.
The RBA Rate Tracker, powered by the ASX, shows market expectations of a change in the cash rate, based on trading activity.
|
Trading day |
No change |
Increase to 4.35% |
|---|---|---|
|
31st October |
50% |
50% |
|
30th October |
48% |
52% |
|
27th October |
53% |
47% |
|
26th October |
53% |
47% |
|
25th October (day of CPI print) |
45% |
55% |
|
24th October |
79% |
21% |
The performance of the Aussie dollar tells you how currency speculators see the cash rate’s future. When interest rates are higher in Australia relative to other countries, the dollar often appreciates, because investing in interest yielding products in Australia becomes more lucrative.
In the aftermath of both the CPI inflation and retail trade numbers, the dollar immediately appreciated. Throughout October though, the dollar has fluctuated between $0.64 and $0.63, with these spikes not causing it to increase outside of this range. For the moment, it looks like traders are holding their breath.
The Treasurer?
In an unusual step, Treasurer Jim Chalmers downplayed the possibility of a November rate hike in the aftermath of the CPI release.
“[The RBA] will obviously assess these numbers in their own way, but what we’ve seen today is consistent with our expectations. It doesn’t materially change the outlook going forward,” Chalmers said.
Clearly, he, and presumably the Treasury Department and the rest of the federal government, favour rates staying at 4.10%.
There’s a myriad of reasons for this: It’s tough politically; governments secretly like inflation and strong economic growth in the short term; a weaker Aussie Dollar makes exports cheaper; continued wages growth pushes workers into higher tax brackets, and hence more tax revenue - among other reasons.
Now, the RBA is supposed to be independent from the government, which means Michele Bullock and the RBA board don’t need to pay Chalmers' words any heed, in theory.
It's worth keeping in mind though it isn’t normal for the Treasurer to express such a clear preference, and the fact that a rate hike would almost directly contradict his wishes might be a bit of an elephant in the room come 7 November.
Rate changes in December and beyond
The RBA has been clear that inflation continues to be its number one priority. Michele Bullock has acknowledged the struggles facing mortgage holders, and of the need to also consider preserving employment gains, but every monetary policy statement reaffirms the board's commitment to doing whatever is necessary to combat inflation.
The monetary policy decisions in December and beyond, into 2024, will be drawing from future inflation releases, so it's difficult to make predictions without this information. A new set of data will also shape the RBA’s future Statements of Monetary Policy - the next will be due later in November. This will be telling, and will demonstrate if upside inflation surprises have pushed out their goal of returning inflation to target by end-2025.
Economists from the big four banks have still given it a crack as to which way the wind will blow, though.
CommBank
While Gareth Aird believes 4.35% is likely to be the highest the cash rate goes, it will likely remain there for a while.
“Our base case sees the RBA hold the cash rate at 4.35% until Q3 2024, when we look for an easing cycle to commence,” he said.
“Monetary policy is unlikely to return to a more neutral setting until mid 2025.”
CommBank’s most recent prediction is for the cash rate to reach about 2.85% by mid 2025.
Westpac
Westpac economists say Aussies should not see the expected rate rise in November as a “one and done”, but that the forward guidance will not chance significantly from the consistent message that the board will act as needed as the inflation data comes in.
“In our view, that would make February the next ‘live’ board meeting beyond November,” wrote Richard Franulovich, Martin Whetton, Imre Speizer, Robert Rennie & Sean Callow.
NAB
Tapas Strickland said the CPI data led NAB to revise its inflation forecasts, but that the bank still sees a 4.35% cash rate remaining until September 2024, when the beginning of an easing cycle is pencilled in.
That being said, NAB still expects the RBA will need to modify its expectations for disinflation, with the current forecasts “overly optimistic”.
“The RBA’s August forecast embedded a hope that they were already making in-roads into that demand driven domestic inflation problem,”
“The key implication of [Q3 CPI] data is that that hope was misplaced even as below trend growth and some gradual cooling in the still-tight labour market should see progress over the quarters ahead.”
ANZ
Adam Boyton said that beyond the November meeting, he and ANZ expect the RBA to return to an “extended pause”. However, risks remain that tightening beyond that could be required, and he still feels any easing is a “very long way off”.
Read more: When will interest rates go down?
