We reaffirm our expectation that the RBA Monetary Policy Board will again increase the cash rate at the November meeting. Inflation is still too high, and the RBA is sanguine about the labour and housing markets.
- We reaffirm our expectation that the RBA Monetary Policy Board will again increase the cash rate at the November meeting. Today’s inflation data and Senate testimony are the final pieces of information before the RBA Monetary Policy Board (MPB) meets next week. Recent data and communication have consistently pointed to the staff recommending an increase in the cash rate. We expect a majority of the external members to agree, though some members might dissent.
- Inflation is above target, and above what the RBA’s August forecasts implied. Some upside risks identified in August have partially materialised, particularly energy prices. The RBA is especially worried that above-target inflation will become embedded in people’s expectations and pricing decisions. It will therefore deem that further policy tightening is needed.
- The RBA has made it clear that it is down-weighting the recent easing in the labour market, even though this was more than it forecast. In today’s opening statement to the Senate hearing, the Governor said, “Despite the unemployment rate recently rising a little more than we had expected, the labour market seems a little tighter than we had previously judged. The evidence for this is elevated underlying inflationary pressures. That is, when we exclude some of the large volatile price movements such as fuel we see inflationary pressure in areas that reflect domestic demand for goods and services.” In the Senate, the Governor also said that they were not worried about the current pace of increase in unemployment.
- Of course, this takes no account of the lagged relationship between the labour market and inflation. The argument is that if that measure of inflation last quarter was too high, it must therefore be that the labour market is too tight. Nor does it allow sufficiently for non-labour cost shocks, which business surveys indicate are the real issue. But whether this judgement by the RBA turns out to be right or not will not be revealed for some time, certainly not soon enough to change its mind before next week. And while some MPB members might have a more optimistic view about labour supply trends than the RBA staff, they are likely to be a minority.
- The RBA is also relatively sanguine about the current downturn in the housing market. The Governor and other RBA officials are at pains to highlight that they do not target housing prices; nor should they. The RBA considers that most, though not all, of the current downswing is an expected effect of tighter monetary policy.
- The question then turns to the future beyond November. While we still expect a hawkish tone in the RBA’s communication until inflation has clearly turned down, further hikes beyond next week are not currently our base case. Clearly, though, the risks of another hike – most likely in February – have increased. Our current forecast for Q4 inflation would seem to give them cover for such a move. We note, however, that home-building costs in the CPI have undershot expectations in the past couple of months. This might imply a different view of the extent of domestic demand pressures than the RBA currently believes.
- However, a lot can happen in three months, as we have just seen. The conflict in the Middle East could escalate further, lifting energy prices beyond our current base case. It could also go the other way, though, if the US and Iran manage to strike a post-midterm-election deal. And as their counterparts in New Zealand highlighted today, one risk is that the global economy weakens suddenly. In the post-meeting statement, the RBNZ Monetary Policy Committee said, “the world economy could tip abruptly into a downturn causing weaker inflation over the medium term.” This risk was something the RBNZ MPC thought could crystallise in the next six weeks. Whether on this timetable or something more drawn out, this possibility does not appear to be on the RBA’s radar. Nor is it our base case, though we have previously worried that the AI financing boom could hit a wall quite suddenly.
