MNI RBA WATCH: Board To Consider Hike On Strong CPI

The Reserve Bank of Australia board will strongly consider increasing the cash rate by 25bp or more when it meets Nov 7 thanks to materially higher quarterly and monthly inflation results, strong house prices and a still-tight labour market.

An increase would break the RBA’s four-month pause this hiking cycle, which began in May 2022, and confirm Governor Michele Bullock’s recent bullish communications that some say have paved the way for higher rates. (See MNI: Fresh Forecasts To Dictate RBA's Nov Decision - Bullock)

Ex-RBA staffers tell MNI the Reserve's board could also choose to raise the cash rate, currently at 4.15%, by 40bp in November, while a lower, 25bp increase could leave it on course to consider hiking a second time by the same amount to 4.6%, either in December or February. The RBA has a tendency to hike multiple times closer together before pausing to assess the impact of higher rates on the economy, they tell MNI.

The publication of the Reserve's refreshed Statement on Monetary Policy will also follow the board’s decision on Nov 10 and show whether officials believe the RBA can pull inflation back to the 2-3% target by its mid-2025 estimate. Any change to forecasts could have significant implications for the RBA’s future policy stance.

The Overnight Index Swaps market has priced in a 69% probability of higher rates next week, down from the 80% seen directly after the release of Q3's CPI results.

PRICES RISE

Inflation was 1.2% in the September quarter and 5.4% y/y, while the monthly read – released simultaneously – was running at 5.6% y/y, Australian Bureau of Statistics data showed Oct 25. Both measures printed higher than market expectations, which had Q3 CPI at 1.1% q/q, or 5.3% y/y, and monthly inflation at 5.3% y/y. The higher reads will concern the RBA, which has forecasted CPI to fall to 4.25% by Q4.

Household spending also rose 4.9% y/y in September, with non-discretionary increasing 9.2% and discretionary rising 0.3%. Retail trade also strengthened 2.0% y/y in September, up from 1.6% in August. (See chart)

Former RBA staffers and advisors have told MNI the higher CPI has “baked in” an interest rate increase at the November meeting. (See MNI: CPI Bakes In RBA November Rate Rise - Ex Staff)

MIXED DATA

While both housing and labour markets have continued to show strength, recent data suggests future resilience could start to weaken.

Corelogic’s Home Value Index rose 0.9% m/m in October, up from September’s 0.7%, an almost full recovery from the 7.5% y/y drop recorded between May 2022 and January 2023. However, q/q growth slowed to 2.6% over Q3, from Q2’s 3.7%, due to higher stock levels and stretched affordability. (See chart)

A fall in participation drove the tight September unemployment figure, stronger than forecast at 3.6%. However, job creation fell significantly to 7,000 from the prior month’s above-average 65,000 and the 20,000 monthly average. (See MNI BRIEF: Aussie Unemployment Strong At 3.6%, Employment Weak)

The RBA wants unemployment to rise to 4% by Q4 and views strength in the housing market as evidence rates remain less restrictive and supportive of consumer sentiment.

Bullock will reveal more on the RBA’s decision when she speaks at an industry conference in Melbourne on Nov 21.