MNI: CPI Bakes In RBA November Rate Rise - Ex Staff

This week’s higher inflation figures will force the Reserve Bank of Australia to steepen its forecasts for the projected path of prices and to hike the cash rate a further 25bp to 4.35% at its Nov 7 meeting, former RBA staff and advisors told MNI.

“This week’s CPI numbers have baked in an interest rate rise and I would have to revise my mental models if the RBA did not raise rates,” noted Martin Eftimoski, head of research and acquisitions at property development and construction company Eternal Homes Projects and a former RBA economist.

CPI rose 1.2% in the September quarter and 5.4% y/y, while the monthly read – released simultaneously – increased 5.6% y/y, Australian Bureau of Statistics data showed Tuesday. RBA Governor Michele Bullock struck a hawkish tone during her first public speech in Sydney Tuesday, noting the board will not hesitate to raise the cash rate further if there is a material upward revision to the inflation outlook. (See MNI: Fresh Forecasts To Dictate RBA's Nov Decision - Bullock)

REFRESHED FORECASTS

Any extension of the RBA’s mid-2025 projected timeline for returning inflation to its 2-3% target would spur the board to act, said James Morley, professor of macroeconomics at the University of Sydney. While the Reserve will publish refreshed forecasts, including for inflation, unemployment and GDP, in its updated Statement on Monetary Policy on Nov 10, the board will have access to them at its board meeting three days earlier.

“I think they would basically use that as a basis to raise rates, which will affect their forecasts and bring it back down to the target at the same time as they had had prior to this recent change in global inflation,’” Morley noted.

Bullock stated during a senate hearing Thursday that the RBA would change its economic forecasts following recent elevated quarterly and monthly inflation prints, but added that it was unclear whether this would materially impact monetary policy.

Eftimoski, believes the RBA will steepen its curve of expected inflation, but that it will foresee that higher rates will bring it to target within the existing mid-2025 forecasted period.

“The RBA will be more aggressive,” he said. “My read of Bullock’s speech this week was hawkish.”

ROOM TO MOVE

Morley noted the RBA board may feel the Australian economy can weather higher rates, as the economy remains strong, house prices continue to rise and the labour market is tight, despite early signs of weakness.

Australia’s unemployment rate fell 0.1 pp to 3.6% in September, stronger than the 3.7% expected, however, employment was softer than anticipated, growing by 7,000 – significantly lower than the 20,00 predicted, according to Australian Bureau of Statistics data.

Morley said worst-case scenarios have not come to pass. "There's still effects from past hikes that will play out, but I think the RBA view is that it could raise rates further without it triggering a recession via immediate cash flow effects," he noted. "The real interest rate is not particularly restrictive and as inflation comes down the real interest rates go up a little. We haven't seen the effects of higher real rates which would usually lead to a contraction in economic activity."