Upward Forecast Revisions Add To Rates Pressure Beyond November

The RBA revised up its growth and inflation forecasts in its November Statement on Monetary Policy. It reiterated that inflation, including underlying, is moderating at a slower pace than expected and thus rates were increased this month. Headline and core are now not expected to reach the top of the target band until end 2025. This and the upward revision to growth mean that our cash rate equation is signalling further tightening.

• The model contains the forward looking inflation gap using the mid-point of the target band. The RBA’s forecasts mean that this gap remains positive over the time horizon. Also the output gap doesn’t close until Q2/Q3 2024 and then is only slightly negative and doesn’t deteriorate.
• These factors put upward pressure on rates and so the equation is estimating a 5% OCR by mid-2024, 50bp higher than our August estimate, with possibly another hike by year end, significantly more than what the market has priced in. The policy reaction function is simple and just looks at economic fundamentals but is pointing to further tightening.
• Inflation above the mid-point of the target band doesn’t warrant any easing according to our model, consistent with the “high for longer” outlook for rates.
• Now that house prices are rising again, the equation that includes them is in line with the one without. Thus, it is not surprising that the RBA mentions house prices as an upside risk.