Analysis
RBA Hike Odds Pass 60% Ahead of Wednesday's Inflation Data
Markets now price a better than 60% chance that the Reserve Bank of Australia raises rates on November 3, up from below 20% a week earlier. Deputy Governor Andrew Hauser called the inflation outlook "materially worse", and third-quarter CPI on Wednesday will decide whether the bet holds. The Australian dollar was flat at 70.32 US cents.
A week ago the Reserve Bank of Australia looked done for the year. September's labour report had pushed unemployment to 4.7%, a five-year high, and market pricing for a rate increase at the November 3 meeting fell below 20%. On Monday, ABC's markets blog put the odds above 60%, and at around two-thirds early in the session, with a hike fully priced by February. Two speeches in five days did the work, and the third-quarter consumer price index on Wednesday, October 28, will decide whether the market has moved too far.
The first came from Deputy Governor Andrew Hauser at a Citi conference in Sydney on October 21. He said the inflation outlook was "materially worse" than the bank had forecast, that some people in the community were not sure the RBA would bring inflation back to target at all, and that businesses increasingly treated 3% or 3.5% as the new normal. "That is the central banker's nightmare," he said, according to the ABC, adding that the bank could not allow expectations to drift away from target. Bloomberg's pricing for a November move jumped to 51% that day. UBS economist George Tharenou called the remarks hawkish and forecast a hike; Betashares' David Bassanese said the RBA was setting the stage for a Melbourne Cup day increase.
The second came on Sunday night. Asked on 60 Minutes, in an interview recorded on October 21, whether inflation had been tamed, chief economist Sarah Hunter answered: "Unfortunately, not quite yet," and noted that the board had already put through four rate increases this year. Markets read it as the same message from a second senior official, and the pricing moved again. The cash rate stands at 4.60%; a quarter-point move would take it to 4.85%.
Wednesday's data now carries most of the weight. Forecasts cited in local coverage put the quarterly trimmed mean, the RBA's preferred core measure, at about 1.0%, above the 0.8% pace the bank had projected; a figure at or above that would make a hike hard to avoid, while a soft print would revive the case for waiting, which Commonwealth Bank economists still expect. The decision lands on Tuesday, November 3, the same day as the bank's new forecasts in its Statement on Monetary Policy.
The currency has not yet joined in. The Australian dollar was flat at 70.32 US cents on Monday afternoon, with the Federal Reserve also deciding on Wednesday, and the ASX 200 recovered from an early fall of 0.8% to close 0.2% higher at 8,810. Australia's 10-year yield, at 5.17%, already sits 20 basis points above the US equivalent. If Wednesday confirms what the speeches implied, the move in rates has mostly happened; the move in the currency may not have.