RBA rate at 4.85% in sight; economists disagree on further tightening

Since the rate rise is already largely anticipated by markets, the Australian dollar might not gain much from the decision itself; a potential decline after the fact is possible if the RBA hints at a pause. What the central bank signals about the future is the decisive element for the Australian dollar. Were the RBA to indicate that further increases may follow — as ANZ predicts — the Australian dollar would get a boost, and short-term yields would rise. In contrast, a message that mirrors AMP’s argument to stop after this move could keep a lid on any advance. The Australian dollar, which is changing hands close to 70 US cents, also has to contend with powerful external forces: the US midterm vote and the situation in Iran are shaping the wider appetite for risk. Because the Federal Reserve is also raising rates, the relative advantage from the RBA’s increase is smaller than it would be on its own.

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Earlier pieces on the RBA decision:

• With 31 out of 32 economists expecting a rise, Deutsche Bank is the only one calling for the RBA to hold.
• JPMorgan also expects a hike at the November meeting, suggesting tightening pressures will remain.
• Banks warn of a possible further move in February, as the RBA appears ready for a fifth hike to 4.85% in 2026.
• ING, which supports a 25-basis-point rise next week, has raised its AUD/USD forecast to 0.71.
• Strong inflation data could lead to consecutive rate increases, according to Natixis’ Garcia Herrero.

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The coming move by the RBA has near-unanimous backing, yet opinions diverge on the following step, and because the rate rise is already factored into prices, the statement’s tone carries more weight than the decision for the local currency.

Key points from the outlook:

• The RBA is tipped to add 25 basis points to take the cash rate to 4.85% on Tuesday, marking its fifth upward move this year and the highest level since 2008.
• The announcement is scheduled for 2:30 p.m. AEDT (0330 GMT), after which Governor Michele Bullock will hold a press briefing.
• HSBC’s Paul Bloxham is working on the assumption of a November increase; ANZ warns that a move to 5.10% by December or February is a material possibility.
• AMP’s chief economist, Shane Oliver, thinks a rise is needed to maintain the RBA’s own credibility, but he argues that should be sufficient to let the bank stay put afterward.
• Trimmed mean inflation came in at 1.0% for the September quarter, above the RBA’s 0.8% prediction, while house prices dropped for a seventh consecutive month in October.
• Because the rate rise is already reflected in market pricing, the currency’s response will hinge on what the RBA indicates about the future rather than on the decision itself.

The Reserve Bank of Australia is broadly anticipated to add 25 basis points to the cash rate, setting it at 4.85% on Tuesday. That step, if taken, would be the fifth of the year and the highest since 2008. While economists are united on the imminent decision, they differ on the subsequent path.

The rate call is set for 2:30 p.m. AEDT (0330 GMT), after which Governor Michele Bullock will face reporters. The RBA moved the cash rate up to 4.60% in September, and the more cautious tone taken by top officials since then has led many analysts to expect another increase. Core inflation has proved stronger than the RBA had expected: the trimmed mean climbed 1.0% in the three months to September, compared with the central bank’s projection of 0.8%.

Paul Bloxham, HSBC’s chief Australia economist, treats a November increase as his central assumption. ANZ looks for a rise too but perceives a further threat ahead. According to its economists, fears within the RBA that inflation expectations could be changing create a meaningful chance that the cash rate will go up to 5.10% in December or February.

Shane Oliver, the chief economist at AMP, believes the RBA will raise rates to intensify its battle with inflation. Standing pat, in his view, would hurt the bank’s credibility and lock in higher expectations of price increases. Still, he is less aggressive about the period after Tuesday, arguing that the rise this week should be adequate to allow a pause for now. That is a change from his earlier position, when he did not predict a November hike.

The broader environment adds complications. Residential property prices slipped for the seventh month in a row in October, increasing the strain on households as the effect of previous rate increases continues to spread. Should Tuesday’s statement make any reference to that stress, it would be taken as an indication that the RBA is close to the peak of its tightening cycle.

A large jump for the Australian dollar appears unlikely. Interbank futures have already priced in a rise, making the currency responsive to the words of the statement and of Governor Bullock rather than to the rate increase. If the RBA opens the door to more tightening, that would help the dollar; if it sounds more like the AMP view of a one-time move followed by a pause, the dollar could retreat.