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MNI RBA WATCH: Hot Inflation Means 25bp Hikes Into 2023
The Reserve Bank of Australia is expected to deliver a 25bp hike to 2.85% at its Nov 1 meeting after a red-hot September quarter inflation print triggered the pricing in of additional hikes and a terminal rate above 4%.
A seventh consecutive increase in rates will lift them to their highest level since April 2013, but the most aggressive tightening cycle in three decades is expected to push into 2023 after the September quarter CPI rose at a 7.3% y/y pace. The higher-than-expected inflation prompted some economists to call for a 50bp hike next Tuesday. (See MNI INSIGHT: Economics Pointing To Rate Hikes Into 2023)
The decision to downshift to a 25bp hike at the October meeting - and wrong-foot consensus calls for 50bp - was "finely balanced" according to the meeting's minutes, with the bank acknowledging in its post-meeting statement that inflation was expected to rise "over the months ahead". The decision to slow the pace of hikes reflected the fact that rates had "increased substantially" since the RBA started tightening in May from a low of 0.1%. (See MNI STATE OF PLAY: RBA Taps Brakes, Sees Slower Pace of Hikes)
The RBA has been wary of a shift in inflation psychology should it trigger a change in wage and corporate price setting behaviour. Feeding those concerns has been tight labour supply, but September jobs data suggested steam may be coming out of the market. Only 900 new jobs were added, compared to a forecast 25,000, and the unemployment rate remained steady at 3.5%. NAB's September Business Survey showed signs of easing labour and purchase cost growth.
INFLATION FIGHTING CREDENTIALS
Despite the CPI shock, the RBA is expected to use its monthly meetings to keep tightening in 25bp increments. 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).
A backflip to a 50bp hike after one month could also be viewed as a reputational blow at a time when a Treasury-backed review of the central bank's board composition, forecasting, policy implementation and communication is in full swing (See MNI BRIEF: RBA Review To Leave No Stone Unturned). However, some economists believe it could burnish the RBA's inflation fighting credentials.
It's been a bruising 12 months for Martin Place after it abandoned its yield curve control policy last November, upsetting mortgage borrowers who believed rates would be held at 0.1% until 2024. This was followed by a mea culpa from Governor Philip Lowe in September when he acknowledged the Bank's "very large forecast miss" in assessing the inflation risk. (See MNI: RBA's Lowe Says Case For Slower Hikes Becoming Stronger)
Lowe will provide additional insight into the Bank's thinking when he presents a speech on the evening of Nov 1. The RBA will release its Statement on Monetary Policy on Nov 4.
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