The RBA Board is likely to hike its key rates by 25bps at today's final meeting for 2022 (decision due at 2:30pm AEDT), lifting the cash rate target to 3.1% and the Exchange Settlement rate to 3.0%. Rates have been hiked rapidly rising by 275bps since May and with the full effect of that tightening to come the hiking cycle may be approaching the end of the line.
Today's meeting appears relatively straightforward. Inflation is far above the RBA's target band and, despite a softening in the monthly CPI indicator, is unlikely to have peaked. Wages growth is finally picking up rising above 3% for the first time in 9 years in Q3 as the labour market continues to tighten. A rebound in employment saw the unemployment rate fall to a new half-century low of 3.4% in October. The RBA does not assess the pace of wages growth to be inconsistent with the inflation target but given the significant reduction in labour market spare capacity to very low levels, it is keeping the situation under close monitoring.
The forecasts published by the RBA last month show inflation is expected to fall gradually over the next couple of years but to still be above the top of the target band in late 2024. As a result, the Board has retained its guidance that it expects to raise rates further, a message it will want to act on ahead of its summer break. There are, however, signs that a pause in the hiking cycle is approaching.
The RBA has said it is aiming to return inflation back to the 2-3% target band "over time" while keeping the economy "on an even keel" by avoiding overtightening. To help guard against that risk, the pace of tightening was downshifted to a 25bps hike in October following four 50bps increases in succession. While not precluding a return to 50bps hikes if required, the November meeting minutes noted the Board was open to pausing the hiking cycle given rates had "increased significantly" and the full effect of that tightening was yet to be transmitted to the economy.
Futures markets price the terminal cash rate to be around 3.5%, though yields on 3-year Commonwealth government bonds suggest it could be slightly lower. After today's meeting, the RBA Board will next meet on February 7. Another rate hike could be in order there given the meeting will follow the Q4 CPI data that is expected to see inflation hit a peak of 8%, but that might be about it for the hiking cycle.
