25bps Hike Expected as Inflation Rises

The Reserve Bank of Australia (RBA) is anticipated to increase interest rates during its meeting on Tuesday, following indications of inflation rising again and some assertive comments from central bank officials.

Analysts predict that the RBA will raise the benchmark interest rate to 4.35%, driven by stronger-than-expected economic data released in October, which prompted many experts to revise their projections. Major Australian banks, including ANZ and Westpac, have moved their forecast for a rate hike to November, while UBS and ING also anticipate an increase at the RBA’s meeting on November 7.

New RBA Governor Michele Bullock recently issued a cautionary note, highlighting that inflation risks remain and further rate hikes may be necessary. Although the inflation reading for the third quarter was only slightly above expectations, stronger-than-expected consumer spending data has reinforced the likelihood of a November increase.

Additionally, Australia’s job market continues to show resilience, significantly contributing to retail spending this year. The employment rate recently reached a record high, while unemployment figures remain low.

Despite the rise in inflation during the third quarter, it exceeded expectations by just a small margin, leading some analysts to believe that the RBA’s decision to raise rates may be closely contested. Luci Ellis, Chief Economist at Westpac Group, noted in a recent analysis that the decision is finely balanced, indicating that keeping rates unchanged remains a possibility. However, she expressed doubt that the RBA will seek to convey a narrative supporting a pause in rate increases.

On Monday, the local currency rose by 0.1% to reach a two-month high as anticipation built for Tuesday’s decision. In contrast, local stocks performed slightly less favorably than their Asian counterparts.

The RBA has raised rates by a total of 400 basis points since early 2022 to address a surge in inflation following the COVID-19 pandemic. The central bank has maintained steady rates since May as inflation has steadily decreased from the peaks reached earlier this year. However, with inflation still significantly above the RBA’s annual target of 2%, the bank has indicated that additional rate hikes could be on the table if needed.

Looking ahead, Australian economic growth is expected to slow considerably in the coming months due to the pressure of high interest rates and ongoing inflation. The central bank is likely to remain cautious about further rate hikes, as it aims to balance the fight against inflation with the need to support economic growth.