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Free AccessMNI RBA WATCH: Another 25bp Hike, Eyes On Guidance Tweaks
The Reserve Bank of Australia is expected to lift rates by 25bp on Tuesday, but the focus will be on any tweaks to forward guidance that may signal the timing of a pause in its tightening campaign next year.
A hike to 3.1% would lift rates to their highest level since late 2012 and cap a run of eight consecutive rate increases that would have delivered a cumulative tightening of 300bps since May, with the impact evident in falling house prices and depressed consumer sentiment.
The RBA's guidance at recent meetings has stated it "expects" to increase interest rates over the period ahead. However, comments by senior officials hinting at a possible pause offers the opportunity to tweak the statement to introduce more flexibility around the timing of any further hikes.
Deputy Governor Michele Bullock said on Nov 9 that "there might be an opportunity to sit and wait and look a little bit about what's going to happen next." On Friday, overnight index swaps pointed to a peak rate of around 3.6% in 2023, down from around 4% last week. (See MNI BRIEF: RBA's Bullock Sees Rates Up A "Little Bit" Further)
A two-month wait until the RBA's next meeting on Feb 7 gives policymakers time to assess the impact of the most aggressive tightening cycle since the 1990s. Governor Philip Lowe said on Nov 1 that the Bank would be "watching very carefully" how the economy and inflation evolves over summer. (See MNI: RBA Ready To Step Up Hikes, Hold Steady If Required - Lowe)
INFLATION OUTLOOK
Taming inflation remains the Bank's top priority. Policymakers received good news during the week when October CPI printed at 6.9% y/y, down from 7.3% y/y in September. However, inflation is expected to remain elevated over coming months as higher electricity and gas prices pass through, and so too higher fruit and vegetable prices after flooding on Australia's east coast. The RBA expects inflation to peak around 8% y/y by the end of the year. (See MNI BRIEF: RBA Ups Key Inflation Forecast As Energy Costs Soar)
Household spending and home prices are big risks to the economic outlook and will weigh on policy considerations. The RBA has acknowledged rates have increased "materially" since May and the full impact on mortgages is yet to be felt. CoreLogic's National Home Value Index fell 1% in November, with prices down 7% from their April peak. There will be additional mortgage pain as a large share of fixed rate mortgages taken out at lower rates expires in 2023.
Consumer spending may finally be feeling the bite from the RBA's rate hikes. Retail sales fell 0.2% in October, the first monthly decline this year. Measures of consumer sentiment are around recessionary levels. Australian accumulated AUD250 billion of savings during the pandemic, and they have been used to smooth spending amid rising rates and high inflation. Additionally, the labour market remains tight and wages – which, as measured by the Wage Price Index, gained 3.1% y/y in Q3 -- are expected to gather pace.
To read the full story
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Why MNI
MNI is the leading provider
of intelligence and analysis on the Global Fixed Income, Foreign Exchange and Energy markets. We use an innovative combination of real-time analysis, deep fundamental research and journalism to provide unique and actionable insights for traders and investors. Our "All signal, no noise" approach drives an intelligence service that is succinct and timely, which is highly regarded by our time constrained client base.Our Head Office is in London with offices in Chicago, Washington and Beijing, as well as an on the ground presence in other major financial centres across the world.