Expected rate hike brought forward to September, as hawkish rhetoric outweighs the tactical risks
- We shift the timing of the next rate hike to September from November. When we last updated our rate forecasts, we highlighted that “the probability of the September scenario is not zero.” We also said we would watch RBA communication closely for signs that the leadership is anxious to move.
- That communication has clearly escalated over recent days. In particular, Governor Bullock today flagged that upside risks to inflation appeared to be materialising. Materialisation of those upside risks was the conditionality set in August for further rate hikes, noting that the forecasts published in August did not support further rate hikes.
- There were tactical reasons to favour November over September, including that the August CPI will be released the next day and might not align with the hawkish message of the July outcome. (Recall that the RBA has previously said they would focus on the quarterly trimmed mean over the noisy monthly data.) A de-escalation of the conflict in the Middle East, fuel excise tax adjustment or soft labour market report could also lead to awkward optics.
- As we highlighted in our note of 8 September, though, “if the internal members felt the situation was more urgent and wanted to get the hike done in September, we believe they could muster a majority of Monetary Policy Board (MPB) votes in favour.” Recent rhetoric shows that they will try.
- We continue to expect a split vote at the meeting. There are likely to be material differences of view about trend growth in supply capacity. Some of these will be evident in the forthcoming Intergenerational Report. As well as differing views on trend productivity growth, we believe some MPB members will go into the meeting with differing views on trend growth in labour supply (participation rate) and current labour market slack, noting that underemployment has increased materially in recent months.
- There is a risk of a follow-up hike. Much depends on the data flow after the meeting. We have not adjusted our view of the timing of eventual rate cuts (currently pencilled in as starting August 2027) but would need to do so if a follow-up hike comes into the base case.
