Market split 50/50 on interest rate decision

Economists and commentators alike appear to be bracing themselves for the Reserve Bank of Australia (RBA) to increase the official cash rate by 0.25 per cent to 4.35 per cent during the board’s monetary policy meeting today (7 November).

However, the ASX’s RBA rate tracker seems to suggest that the wider market is on the fence about what the central bank will decide to do this afternoon, with 50 per cent calling no change in the cash rate, and 50 per cent predicting an increase as of 6 November 2023.

Nevertheless, the September quarter Consumer Price Index (CPI) data released by the Australian Bureau of Statistics (ABS) in late October revealed an increase in the CPI of 1.2 per cent (up 5.4 per cent annually), which has been enough to shift the expectations of the major banks towards another rate hike.

The RBA’s recent rhetoric, in which it noted that it has a “low tolerance for a slower return of inflation to target than currently expected” raised eyebrows among economists, despite RBA governor Michele Bullock recently stating that the central bank was unsure on whether or not the CPI data represented any “material change”.

“We’re still analysing the number, I’m not prepared to say yet whether or not it’s to change our forecast, because there is going to be a change to our forecasts,” Ms Bullock stated during the Senate legislation committee on 26 October.

“We have to look at whether or not it’s material enough to change our views on monetary policy.”

Tightening is needed

In the lead-up to the November meeting, the International Monetary Fund has urged the RBA to resume its monetary policy tightening in order to bring “sticky” and “high and persistent” inflation back towards the target range of 2–3 per cent.

“Although inflation is gradually declining, it remains significantly above the RBA’s target and output remains above potential,” the IMF stated.

“Staff therefore recommend further monetary policy tightening to ensure that inflation comes back to the target range by 2025 and minimise the risk of de-anchoring inflation expectations.”

Possible benefits to home owners

Founder and managing director of Rethink Investing, Scott O’Neill, flagged that another rate hike could “potentially bring long-term benefits to home owners”.

According to Mr O’Neill, another hike may “pave the way for expedited subsequent rate cuts”.

“This could create a dynamic situation where interest rates remain elevated for a brief period, subsequently leading to a faster economic recovery and lowering of rates in the following year,” he said.

“Home owners, therefore, might find themselves in a more favourable lending environment, with lower mortgage rates and increased affordability.”

Mr O’Neill also provided an “alternative scenario” in which the RBA decides to continue to pause rates, but suggested that it could raise concerns about the “prolonged stability” of interest rates despite offering immediate relief to home owners.

“If rates remain stagnant, home owners might face a protracted period of uncertainty, unsure of when or if favourable changes in interest rates will occur,” Mr O’Neill said.

Despite bank economists calling a rate hike, Mr O’Neill stated that he sees “no reason” for interest rates to increase as there are multiple factors contributing to the rise in inflation.

He warned that another rate rise would “destroy the middle class” and that the central bank should be observing holiday spending before lifting rates again.

[RELATED: RBA undecided on increasing rates: Bullock]