RBA to Hold Rates at 4.10% in October, Deliver One Final Hike by End-2023

RBA to Hold Rates at 4.10% in October, Deliver One Final Hike by End-2023

  • The Reserve Bank of Australia (RBA) is expected to maintain its current interest rate of 4.10%, with potential future increases to 4.35% due to higher-than-targeted inflation levels.
  • A majority of economists surveyed anticipate the RBA to hold rates in the short term, with some predicting a final rate hike in November. However, there are differing opinions among major banks regarding the future of rate increases.
  • The Australian dollar’s decline by over 6% this year may impact imported inflation. Economists believe that if the RBA decides to raise rates again, it is likely to happen this year, although the inflation surge is expected to subside by the end of the year.

The Reserve Bank of Australia (RBA) is expected to maintain its key interest rate at 4.10% this Tuesday, as revealed by a recent Reuters poll of economists. However, there is anticipation of a potential increase to 4.35% in the next quarter due to persistently high inflation levels, which currently stand at 5.2% in August, nearly double the RBA’s target range of 2%-3%.

This elevated inflation rate underscores the likelihood of further tightening in monetary policy to bring inflation under control. Out of 32 economists surveyed from September 27-28, all but two anticipate the RBA to keep its official cash rate at 4.10% on October 3. Only two predict a 25 basis-point hike.

Shreya Sodhani, a research analyst at Barclays, notes that a single month’s spike in inflation, primarily driven by oil prices, is unlikely to persuade the RBA to increase rates immediately. In fact, trimmed inflation has actually slowed, indicating that the central bank may find more reasons to stay on hold.

Sodhani expects the final rate hike to occur in November, following the release of broader quarterly inflation data scheduled for October 25. Most economists anticipate that the RBA will wait for this data, along with jobs data, before making a decisive move.

Among the major local banks, ANZ, CBA, and Westpac have expressed the view that the RBA has completed its tightening cycle. Only NAB anticipates another 25 basis-point hike in November.

The Australian dollar has experienced a decline of more than 6% this year, which could potentially contribute to imported inflation and present challenges for the newly appointed RBA Governor Michele Bullock, who will preside over her first meeting in October.

Robert Carnell, an economist at ING, suggests that if the RBA plans to increase rates again, it is likely to happen this year. This prediction is based on the belief that the current inflation surge will likely subside by the end of the year, possibly providing a boost to the Australian dollar.

Median forecasts indicate that rates are expected to remain stable at 4.35% until at least the end of March. Subsequently, a 25 basis-point rate cut is projected every quarter, ultimately reaching 3.60% by the end of 2024.

“We expect inflation to continue its downward trajectory and reach the target by late 2024, which should provide sufficient grounds for the RBA to consider rate cuts,” says Ben Udy, lead economist at Oxford Economics Australia.

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