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2.85% November cash rate announced

In a call that could have gone each way, the central bank has announced a 25 basis points hike for its Melbourne Cup Day rate decision.

The Reserve Bank of Australia (RBA) has delivered a 25-bp rate rise, adding to the misery of all mortgage holders who may have lost money on today’s (1 November) Melbourne Cup race.

Following its monthly board meeting for its monetary policy decision on Tuesday afternoon (1 November), the RBA announced it was raising the official cash rate to 2.85 per cent.

The November announcement follows on from a 25-bp increase in October, which had itself been an anomaly following the 50bp rises announced in SeptemberAugust, July and June.

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It means that the cash rate has increased by 275 basis points since the rate rising cycle began in May 2022

The move to increase the cash rate comes as the RBA attempts to curb rising inflation.

Indeed, speaking of the decision, RBA governor Philip Lowe commented: "As is the case in most countries, inflation in Australia is too high. Over the year to September, the CPI inflation rate was 7.3 per cent, the highest it has been in more than three decades."

"Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role.

"Returning inflation to target requires a more sustainable balance between demand and supply.

"A further increase in inflation is expected over the months ahead, with inflation now forecast to peak at around 8 per cent later this year. Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand."

He continued: "The board has increased interest rates materially since May. This has been necessary to establish a more sustainable balance of demand and supply in the Australian economy to help return inflation to target."

"The board expects to increase interest rates further over the period ahead.

"It is closely monitoring the global economy, household spending and wage and price-setting behaviour.

"The size and timing of future interest rate increases will continue to be determined by the incoming data and the board’s assessment of the outlook for inflation and the labour market.

"The board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that."

Major banks largely expected 25bp call

Leading into the November rate call, Australia’s big four banks had mostly expected a 25-bp increase this month – bar Westpac, which touted a ramped-up 50-bp hit given local conditions and higher inflation.

It came after the Australian Bureau of Statistics (ABS) confirmed a 1.8 per cent rise in the Consumer Price Index (CPI) during the September quarter, taking annual inflation growth to 7.3 per cent — the highest level since the 1990s.

“The September quarter inflation report has come as such a major surprise that we think the Reserve Bank board will decide to raise the cash rate by 50 bps at the next board meeting on November 1,” Westpac’s chief economist Bill Evans said. 

“The best way for the central bank to break this nexus is to adopt strong rhetoric and strong action,” he explained, citing evidence that pricing power is becoming widespread across expenditure items.

Additionally, he referenced last week’s budget papers, which suggested there could be a 50 per cent (or higher) increase in electricity prices in 2023.

“The board should also be concerned about the unusual nature of this cycle as the economy emerges from the pandemic,” Mr Evans said.

He highlighted that having announced a lower-than-expected 25 bp increase at the October meeting, the RBA now had “ample justification” for speeding up the pace of increases again in response to a significant upside shock to the inflation outlook.

Yet while many economists agreed that rates will increase in some way on Melbourne Cup Day, many others were less endeared to the 50bps view.

According to CBA, the RBA would deliver one or two more 25 bp rate hikes before pausing for an extended period. However, the bank acknowledged: “We expect the RBA to raise the cash rate by 25bp to 2.85 per cent at the November meeting. However following last week’s upside inflation surprise there is a non a “non-trivial risk” that the RBA could opt for a larger 50 bp hike," CBA said.

“Ahead of the October board meeting we had ascribed a 60 per cent chance to a 25 bp hike and a 40 per cent chance to a 50 bp hike,"

On the eve of the November announcement, both NAB and ANZ seemed to still side with it being only another 25 bps rise, as did AMP chief economist Shane Oliver who recognised the higher pressure on the RBA.

The rate movements will likely impact the housing market. PropTrack senior economist Eleanor Creagh, said: “The fastest rise to the cash rate since 1994 has quickly rebalanced the housing market from last year’s extreme growth levels, with prices falling from their peak nationally."

She flagged that the latest PropTrack Home Price Index revealed that home prices stabilised in October, with national dwelling values falling just 0.06 per cent, the smallest fall since national home prices peaked in March 2022. 

Prices nationally are now sitting 3.53 per cent below their March 2022 peak. As borrowing capacities are constrained and buyer’s’ budgets shrink, the most expensive markets of Sydney and Melbourne are leading the price declines, and in Sydney prices are down more than 6 per cent from peak and below levels recorded in October last year. 

“From here further rate rises will increase borrowing costs and reduce maximum borrowing capacities, weighing further on prices. However, this will be offset by tight rental markets and rental price pressures, rebounding foreign migration, low unemployment, and housing supply pressures," she said.

[Related: 2.60% cash rate confirmed]

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