Deutsche Bank lone voice for RBA hold as vast majority tip a November hike

The market is heavily skewed towards pricing in a hike, yet a hold as predicted by Deutsche Bank could push the Australian dollar lower and lift short-term government bonds. An increase, on the other hand, would simply validate what traders have been pricing in. The Reserve Bank of New Zealand's decision to stand pat last week, defying broad expectations, shows central banks can break from seemingly unanimous market pricing, which could make traders less complacent ahead of the RBA's call. The oil price outlook is also pivotal; Deutsche's projection of Brent crude at $90 early next year diverges sharply from Goldman Sachs's $105 forecast for December. Consequently, the path of fuel-driven inflation, and the RBA's reaction, rests heavily on Middle East developments after the US midterms.

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Earlier:

• JPMorgan has joined the call for a rate hike at the RBA's November meeting, saying the bias towards tightening remains in place.
• The RBA is on course for a fifth 2026 hike, lifting the rate to 4.85 percent, as banks flag the risk of another move in February.
• ING raised its AUD/USD forecast to 0.71 while backing a 25-basis-point RBA hike next week.
• Natixis's Garcia Herrero says the RBA is set for back-to-back hikes following the hot CPI print.

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Deutsche Bank has gone against the grain, betting the central bank will ignore the prevailing view and hold rates while the oil outlook becomes clearer.

Summary:

• Phil O'Donoghue of Deutsche Bank is the sole forecaster among 32 economists in a Reuters poll to predict an RBA hold on Tuesday; the rest, including Australia's big four banks, expect a quarter-point hike to 4.85%.
• Markets are assigning roughly an 85% probability to a rate rise after September-quarter inflation landed at 3.7%.
• O'Donoghue contends inflation is running in line with the RBA's projections, unemployment has already climbed to 4.7%, and rate rises are taking effect.
• He expects a clearer picture for oil after the midterms by December, with Deutsche forecasting Brent at $90 early next year.
• He urged the board to form its own view rather than bow to the public "echo chamber", pointing to the RBNZ's surprise hold last week.

Nearly all economists and traders expect the Reserve Bank of Australia to raise rates on Melbourne Cup Day. Deutsche Bank is placing a bet that it will not, according to the Australian Financial Review.

In a Reuters survey, 31 of 32 economists predicted a quarter-point increase on Tuesday, bringing the cash rate to 4.85% — its highest in about two decades and the fifth increase this year. That camp includes Australia's big four banks. Market pricing suggests an 85% chance of a rise, and many traders expect a hike before Christmas if one does not happen this week. The announcement is set for 2:30pm Sydney time (0330 GMT, 2230 US Eastern on Monday).

The major outlier among prominent forecasters, Phil O'Donoghue, Australia chief economist at Deutsche Bank, expects the board to hold. His reasoning is that markets are trading on stale figures. While the September quarter showed an annual inflation rate of 3.7%, well above the RBA's objective, O'Donoghue notes that figure matched the bank's own forecasts. The RBA has cautioned since March that prices were elevated and has already delivered a full percentage point of tightening, taking them to the highest level in 15 years. At the same time, the jobless rate has risen to 4.7%, earlier than anticipated.

With the cost of borrowing biting and the economy cooling, O'Donoghue believes the board can afford to hold out for more data in December. By that point, he says, there will be fresh Q4 inflation numbers and a more defined global oil price outlook after the US midterms. Deutsche Bank sees Brent crude falling to $90 a barrel by early next year. Fuel costs have risen by about 60% since the Middle East war began eight months ago and have been a key inflation driver.

O'Donoghue conceded the RBA can take what he called a "free hit" on rates, given that everyone has been primed for a rise by the market and press. He expressed hope that the board would decide for itself rather than defer to the public "echo chamber", pointing out that the RBNZ had done exactly this the prior week by holding rates when markets had fully priced an increase.

He is not the only one challenging the consensus. Another bank economist said markets had overpriced the chance of a hike, putting it closer to 60% to 70%, and noted that the decision sits with a nine-member board after four moves in eight months. Two fund managers have also predicted a pause. One pointed to the Australian dollar's resilience around 70 US cents, while a second warned inflation might have crested, exposing the economy to a drawn-out slump.

The RBA has defied market pricing before. In July last year, it held rates when traders had put a 95% probability on a cut. JPMorgan, among the banks expecting a hike, argues that senior officials have signaled inflation is not yet under control. Whether Tuesday brings a fifth rise or a surprise hold, the board's statement and new forecasts will be watched closely for clues about the cycle's proximity to its peak.