MNI STATE OF PLAY: RBA Seen Leaning Towards 50bps Hike

Reserve Bank of Australia Governor Philip Lowe has telegraphed the Board will consider both a 25bps and 50bps hike at its Oct 4 meeting, with the larger hike more likely given policy sits below the Bank’s estimated neutral rate and inflation pressures remain elevated.

A 50bps rise to 2.85% would be the sixth consecutive hike and lift rates to their highest level since 2013, as well as above the Bank's estimated nominal neutral rate of 2.5%. The minutes of the September meeting highlighted the "still relatively low" level of the cash rate.

The Bank could slow hikes to a 25bps tempo from the November meeting.

Lowe opened up the possibility of easing the tightening tempo in a speech on Sep 8 when he said "a slower pace of increase in interest rate becomes stronger as the levels of cash rate rises", but comments to a parliamentary committee on Sept 16 - after the U.S. August CPI print - highlighted concerns that general inflation psychology "does appear to be shifting" as consumers accept companies passing on higher costs. Deputy Governor Michele Bullock said rates were not "necessarily in restrictive territory yet" on Sept 21. (See MNI BRIEF: RBA's Bullock Says Rates Not Restrictive Yet)

Inflation pressures were underscored by monthly CPI indicator data, released on Sept 29, that showed headline inflation of 6.8% in August, down slightly from 7% in July. CPI, excluding volatile items like fruit, vegetables and fuel, accelerated to a 6.2% y/y pace in August from 5.5% y/y in June.

HOUSEHOLD SPENDING UNCERTAINTY

Third-quarter CPI data is due on Oct 26, a week before the Bank's penultimate meeting for the year on Nov 1. Bullock said the Bank will focus on the quarterly CPI rather incorporate the new monthly measure into its decision making in the short term.

Lowe has cited the behaviour of household spending as a "key source of uncertainty". However, retail sales remained resilient at a 0.6% m/m pace in August. Meanwhile, high job vacancies and a 3.5% unemployment rate reflect a tight jobs market. House price declines have shown some signs of slowing.

Arguments for a smaller rate increase rest on the yet-to-be-felt full pass-through of the previous 235bps of hikes onto standard variable mortgage rates. It usually takes three months for rates changes to flow through to borrowers. Additionally, commodity prices and shipping costs have started to ease. Rising migration should boost the the supply of labour.

A surprise 40bps move can’t be ruled out should the Bank want to return the Cash Rate to conventional settings and signal a slowing of policy. The Board considered 40bps, among other options, at its May meeting.