MNI RBA WATCH: Hikes 25bp, To Miss Inflation Target Until 2025

The Reserve Bank of Australia admitted inflation will not fall back into its target band until 2025 as it appears on track to deliver another 25bp hike at its final meeting of the year after warning of a peak in inflation of "around" 8% later this year.

The Cash Rate was raised 25bp to 2.85% on Tuesday, the highest level since early 2013, as policymakers warned this year's inflation peak would surpass August's forecast of 7.75%. The inflationary impulse is set to cascade into 2023, when the Bank now expects CPI at 4.75% over the year rather than 4.25% as forecast in August. Importantly, inflation was seen to ease gradually "to a little above 3%" over 2024, above the top end of RBA's 2%-3% target range. Inflation rose to a hotter-than-expected 7.3% y/y rate in the September quarter, a 32-year high. (See MNI BRIEF: Aussie 3Q CPI Shock Ups RBA Terminal Rate Forecasts)

Ahead of Friday's release of its Statement on Monetary Policy, the RBA revealed its growth forecasts had been "revised down a little", testament to the expected impact of a cumulative 275bps in hikes since May - and possibly more to come - in the most aggressive tightening cycle since the 1990s. The growth outlook was pared to "around" 3% in 2022, compared to August's 3.25% call, while estimates for 2023 and 2024 were both trimmed to 1.5% from 1.75%.

Despite some calls for a 50bp rise at Tuesday's meeting, Governor Philip Lowe fell back on the reasons he used when downshifting to 25bps at October's meeting after four consecutive 50bp hikes. He noted rates had increased "materially" since May and acknowledged that monetary policy operates with a lag with the full effect "yet to be felt."

DEBATE OVER PAUSE

Combined with concerns about the global economy that has deteriorated "over recent months", there is growing debate over when the RBA may pause to assess the impact of its tightening campaign. Deputy Governor Michele Bullock said on Oct 18 that its ability to meet 11 times a year - there is no meeting in January - is an "advantage in uncertain times", adding the RBA "can potentially move much faster than overseas central banks." (See MNI BRIEF: RBA Can Move As Fast As Other Banks - Bullock).

Market-based pricing of the RBA's prospective rate path softened slightly after Tuesday's meeting. Another 25bp is seen in December, while pricing for the terminal rate was wound back to under 4% from last week's levels which saw a rate above 4% in late 2023. (See STIR : RBA Dated OIS Lower On 25bp Hike & Bank Noting Material Increase In Cash Rates Has Been Deployed). The bank's first meeting of 2023 is on Feb 7 and a 25bp hike is only about 80% priced in, assuming a 25bp hike is delivered in December.

The Australian dollar fell from intra-day highs after the announcement, as 25bps was widely expected by the market. The aussie rallied across the Asian session and recently fetched 0.6440. (See AUD : A$ Dips Post RBA)