The RBA is set to resume its tightening cycle with a 25bps hike today. This would lift the cash rate to 4.6%, its fourth rate hike of the year after the Board returned unanimous decisions (9-0) to hold in June and August. Markets came away from the August meeting pricing the chance of a hike in September no higher than 20% and only 50/50 by year-end. A hike today is now close to fully priced (90%), with a roughly 1-in-2 chance of a further hike by December. The shift has been driven not only by the global hawkish repricing but also by changing RBA commentary to the incoming data.
Increased concern over inflation is likely to force the Board's hand into hiking rates again. While there are developments that validate its assessment that policy is 'somewhat restrictive' with the unemployment rate (4.6%) rising to its highest since late 2021, GDP growth slowing (2.1%Y/Y in Q3) and the housing market cooling, inflation remains well above the target band (2-3%). The RBA's preferred quarterly inflation data to Q2 has headline CPI at 3.9%Y/Y and underlying inflation at 3.6%Y/Y.
At the August meeting, the Board held rates steady as updated forecasts projected inflation would not settle at the midpoint of the target band until 2028, though it noted the risks around that outlook were 'skewed to the upside'. Governor Bullock has since told a parliamentary committee that those 'upside risks to inflation appear to be materialising', a sign that the threshold for it to hike again has been reached. Key factors informing that view were renewed rises in energy prices with the conflict in the Gulf persisting, the AI-related capex surge, and weather-related impacts.
Second-round effects on a broader range of prices and wages from these cost increases are harder to be convinced of, but the RBA is not prepared to risk being found wanting. That is largely due to its structurally hawkish assessment of the economy, which it judges is operating with excess demand, pressures that have been amplified by years of shocks and weak productivity growth that have impaired the economy's supply capacity.
