Tomorrow’s interest rate decision ‘still a close call’, says economist
The Reserve Bank’s decision on interest rates tomorrow is not an obvious one despite strong speculation of a hike, a number of economists and experts say.
T.Rowe portfolio manager Scott Solomon said while it’s widely expected the Reserve Bank of Australia will raise the cash target rate by 25 basis points in its meeting tomorrow, it’s still a close call at this point.
Mr Solomon noted that many other central banks around the world have indicated that they are likely done hiking.
“The minutes of the prior meeting show a surprising balance between a hike and a no hike decision,” he said.
However, given the higher-than-expected inflation figures and the easing of financial conditions, the calculus is tipped in the favour of a hike, he said.
“Governor Bullock will likely try to pitch the decision as largely precautionary in nature. In fact, I think it would be a nice opportunity to hike 15bps and bring the terminal rate to a more traditional 4.25 per cent.
“It is unlikely they do that – but the RBA is no stranger to surprises and it would check a lot of boxes.”
AMP chief economist Shane Oliver agreed tomorrow’s decision is still a close call. The RBA will likely revise its inflation forecast higher for this year due to the upside surprise from the September quarter, he said.
It is still likely to have inflation back in the target range by the end of 2025.
“Another 0.25 per cent rate hike will mean an extra $100 a month in additional debt servicing payments on a $600,000 loan and would take the total increase since April last year to an extra $1435 a month or $17,220 a year,” said Dr Oliver.
“Even if a borrower has secured a 0.5 per cent cut to their mortgage rate, their payments would be up an extra $14,856 a year since April last year.”
Economist Paul Slake said following the September quarter figures and governor Michelle Bullock’s statements about the RBA’s low tolerance for higher than expected inflation, a 25bp increase is now a ‘live possibility’.
“Although the higher-than-expected September quarter number was largely attributable to factors that won't be affected by a further tightening of monetary policy (petrol, utilities, insurance), and the annual inflation figures are still heading in the right direction, I suspect the RBA Board will feel compelled to back their warnings about "low tolerance" with some further action.”
BIS Oxford Economics economist Sean Langcake said the strength of core inflation in the third quarter figures constitutes the type of upside surprise governor Bullock said would warrant tighter policy.
“If the RBA is losing patience and wants to guarantee the return of inflation to target, it is unlikely they will see a 25 basis point move as being enough to get the job done,” he warned.
Harry Murphy Cruise from Moody’s Analytics said Aussie inflation “wasn’t playing ball” with underlying inflation rising for the first time on a quarter-on-quarter basis since September 2022.
“Higher-than-expected September inflation print likely seals the deal for a further rate hike in November,” he said.
In her first speech as governor, Michele Bullock noted “The board will not hesitate to raise the cash rate further if there is a material upward revision to the outlook for inflation”.
“A material upward revision is just what occurred in the latest data,” said Mr Murphy Cruise.
“The next rate decision will come just half an hour before the running of the Melbourne Cup. And while that will be the “race that stops the nation”, the RBA board will be hoping the preceding hike will be the “rate” that stops it too.”
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