The RBA looks set to raise its cash rate again tomorrow, but at this stage I would argue that the rate decision in itself is probably the least interesting part of the meeting outcome.
Markets have more or less fully priced in a chance of a 25 bps rate hike, which would take the cash rate from 4.35% to 4.60% – its highest level in almost 15 years.
Ahead of the decision, Australia’s four major banks are anticipating the RBA to move with a rate hike tomorrow. So barring a major surprise, the bigger question for markets is what happens next.
Let’s start with a bit of background in the run upt to tomorrow’s key decision. Over the past month, the case for another RBA rate hike has strengthened considerably. Headline inflation eased to 3.5% in July, but trimmed mean inflation remained stubbornly high at 3.6%. Meanwhile, RBA governor Bullock has also become more explicit about the fact that the upside risks to inflation may now be materialising. She pointed to persistent excess demand and elevated oil prices amid the Middle East conflict as key drivers for that.
Having said that, it’s not exactly a completely one-sided picture.
Australia’s unemployment rate unexpectedly climbed to 4.6% in August, even as employment rose by 39,500. Adding to that, full-time employment also fell by 6,300 and that gives the RBA at least some evidence that labour market conditions are becoming less tight.
As such, that makes tomorrow’s vote and guidance particularly important – more than the rate decision itself.
If the RBA delivers a 25 bps rate hike alongside a firm warning that inflation risks remain skewed higher, markets are likely to lean more heavily towards another move to 4.85% next. That should keep upward pressure on short-term yields and offer some support to the Australian dollar, as markets are still sitting on the fence with regards to the November meeting. As things stand, traders are pricing in ~41 bps of rate hikes by year-end – including the near certain move this week.
In terms of policy guidance, any changes to this passage from the August meeting will be one that will be heavily scrutinised:
“The Board will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if upside risks materialise.”
A shift towards slightly softer language, however unlikely, could easily produce a sell-the-fact reaction in the aussie.
All that being said, there is also a slightly awkward twist to the RBA rate decision this week. The August CPI report will arrive on Wednesday, just a day after the RBA meeting conclusion.
So, the central bank may very well raise interest rates tomorrow, but Wednesday’s inflation numbers could ultimately tell us much more about whether the RBA is finished for the year.
This article was written by Justin Low at investinglive.com.