The RBA hiked the cash rate by 25bps to 4.85% at today's meeting, the 5th time it has raised the key rate this year. Once again, the RBA lifted its inflation forecasts in the Statement on Monetary Policy, pushing back the expected return of inflation to the 2-3% target band from early to mid 2028. The major surprises were the 6-3 vote split from the Board and policy guidance that was watered down by removing the reference to 'increasing the cash rate target further'. The market reaction to those developments was notable. Pricing for another hike this cycle fell from around a 40% chance to 20%, the 3-year government bond yield declined 8bps to close at a 2-month low (4.77%), and the Australian dollar weakened.
The themes that accompanied today's hike were consistent with the RBA's hawkish messaging going into the meeting around upside risks to inflation coming to fruition. Persistent conflict in the Gulf had kept oil prices elevated, with signs that was now spilling over to a broader range of prices. In addition, Governor Bullock at the post meeting press conference highlighted that capacity pressures in the domestic economy had been more significant than previously thought.
The inflation outlook this year was lifted materially from 3.6% to 4.5% on a headline basis and from 3.3% to 3.6% in underlying terms. Both headline and underlying inflation is then expected to slow over 2027 to 2.7% and 2.9% respectively (both revised up from 2.6%), before eventually returning to the middle of the 2-3% target band in mid 2028, around 6 months later than previously forecast.
Interest rates were already seen as restrictive ahead of today's meeting and this latest hike has made financial conditions a little tighter. The effect of restrictive policy is set to weigh on the growth outlook, which is expected to run at a below trend pace across the forecast horizon. Growth this year is now expected to be 1.6%, a little stronger than previously expected (1.4%); however, downward revisions were made to forecast growth in 2027 (1.3% from 1.6%) and 2028 (1.5% from 1.8%).
As a result, the unemployment rate is now expected to rise more quickly and to reach a higher peak of 5.1% in 2028. If there are signs that this outlook for slower growth and a softer labour market is beginning to play out, markets will look to start pricing in rate cuts; however, they are not yet at that point. The next RBA meeting is on 7-8 December.
