RBA set to hike 25 bps, focus shifts to guidance and August CPI

Tomorrow's RBA meeting is likely to produce another increase in the cash rate, but the actual decision may well be the least noteworthy element of the day, in my view.

Traders have more or less priced in a 25 bps hike, one that would lift the cash rate to 4.60% from 4.35% - a level not seen in almost 15 years.

With the decision due, all four of Australia's major banks expect a rate rise tomorrow. Unless a major surprise appears, then, markets' bigger question is what comes after.

First, some context ahead of tomorrow's decision. Over the past month, the argument for another RBA increase has gained considerable force. Headline inflation slowed to 3.5% in July, but trimmed mean inflation held at a sticky 3.6%. Governor Bullock, for her part, has been more direct in saying the upside risks to inflation may now be materialising. She pointed to persistent excess demand and elevated oil prices amid the Middle East conflict as the key drivers.

It would be a mistake, however, to view the situation as entirely one-sided.

In August, the jobless rate unexpectedly rose to 4.6% even though employment grew by 39,500. Full-time employment fell by 6,300 as well, giving the RBA at least some evidence that labour market conditions have loosened.

For that reason, tomorrow's vote and guidance deserve more attention than the rate decision itself.

If the RBA delivers a 25 bps hike and warns firmly that inflation risks are still tilted to the upside, markets are likely to lean more heavily toward a further move to 4.85%. Such an outcome should keep short-term yields under upward pressure and offer some support to the Australian dollar, with investors yet to commit on the November meeting. At present, traders have roughly 41 bps of hikes priced in by the end of the year, a tally that already includes this week's near-certain move.

As for policy guidance, any edits to the wording from August's statement will be closely scrutinised.

"The Board will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if upside risks materialise."

A pivot to only marginally softer language, unlikely as that is, could easily set off a sell-the-fact move in the Aussie.

There is also a slightly awkward wrinkle to this week's decision. The August CPI report lands on Wednesday, just one day after the RBA wraps up its meeting.

The RBA may well lift rates tomorrow, but Wednesday's inflation numbers may ultimately say more about whether it is finished for the year.