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The Monetary Policy Board of the Reserve Bank of Australia (RBA) is meeting today and Tuesday (2–3 November) to consider the policy settings for the official cash rate, with all four major banks and most of the market backing a 25-basis-point (bp) increase on Melbourne Cup day.
If the RBA lifts the official rate from 4.60 per cent to 4.85 per cent tomorrow, this would mark the fifth rate hike this year and would push borrowing costs to an 18-year high (to levels not seen since November 2008).
Financial markets have moved in lockstep, with interbank cash rate futures now pricing in an 80 per cent probability of a Melbourne Cup Day increase.
The revised forecasts follow hotter-than-expected September-quarter inflation figures.
New data from the Australian Bureau of Statistics last week showed trimmed mean inflation, the central bank’s preferred core measure, accelerated to 3.7 per cent annually, overshooting the RBA’s 3.4 per cent projection.
Headline inflation also pushed higher to 4.3 per cent, underpinned by a 9.4 per cent surge in automotive fuel alongside broad-based service-sector price pressures.
Given rising inflation, two major banks have reworked their cash rate forecasts. Both the Commonwealth Bank of Australia (CBA) and National Australia Bank (NAB) have abandoned their previous “hold” projections and are joining Westpac and ANZ in expecting immediate tightening.
The shift across the major lenders reflects deep concern that inflation is proving far stickier than policymakers had anticipated.
CBA’s economics team stated last week: “We now expect the RBA to hike the cash rate by 25 bps to 4.85 per cent. There are no guarantees it will be unanimous given the back-to-back hikes.
“The key question is whether four hikes this year is enough. Recent RBA communications have been hawkish and suggest the answer is no.
“We see the hike in November as an insurance hike to protect against these forces. Acting early and acting decisively should manage the risk of inflation being higher for even longer.”
NAB’s economists took a similar view, warning that structural capacity limits are constraining the board:
“We now believe that the RBA will deliver a 25 bp hike in November. Despite the unemployment rate sitting 60 bp above where it was at the start of the year, the bank no longer believes this reflects as much of a loosening in the labour market as previously thought,” they said.
“A 25 bp hike will see the cash rate at 4.85 per cent in November, 150 bps above the RBA’s estimate of neutral and 50 bps above the previous peak. Still, powerful structural forces are at play, and all of these are working in the direction of higher short- and long-end rates.”
ANZ economists have also cautioned that the RBA’s next move is unlikely to serve as a mere precaution, signalling that the RBA’s forthcoming Statement on Monetary Policy is set to show underlying inflation tracking above target through 2028.
Moreover, ANZ said there was “material risk” that the cash rate would need to climb further – to 5.10 per cent in either December or February – in order for the RBA to bring consumer prices back to the central bank’s preferred level of 2.5 per cent.
“Using the framework we applied to estimate the RBA’s likely November SMP forecast, we estimate that a cash rate of 5.10 per cent would produce an inflation forecast of 2.5 per cent for mid-2028 and 2.4 per cent at end-2028,” they said.
Meanwhile, Westpac chief economist Luci Ellis reiterated that official rhetoric pointed directly to an immediate hike: “We reaffirm our expectation that the RBA Monetary Policy Board will again increase the cash rate at the November meeting … Clearly, though, the risks of another hike – most likely in February – have increased.”
Other bank economists are also crystallising their cash rate forecasts, with AMP chief economist Shane Oliver pointing out the reputational stakes for the central bank if they fail to act.
In an update on Friday (30 October), Oliver said: “A failure to hike on Tuesday after the RBA’s recent hawkish commentary and the higher-than-expected inflation data would threaten RBA credibility in terms of its commitment to the inflation target.
“At this stage, while there is still a high risk of a sixth hike to 5.1 per cent, our base case is that 4.85 per cent will be the peak with an extended holdout to the December quarter next year.”
Meanwhile, Judo Bank’s chief economic adviser, Warren Hogan, recently issued an even starker warning about the rate cycle’s ultimate destination: “I’ve got the cash rate going to 5.35 per cent. So look, we’re in a dangerous situation.”
Speaking ahead of the RBA’s November cash rate decision, CreditorWatch chief economist Ivan Colhoun observed that if the Australian official cash rate does rise to the highest level in 18 years this week, the change would place further pressure on businesses and consumers with debt, adding to current very high fuel prices.
“Together, these effects will see economic growth slow through 2027,” he said.
Indeed, according to analysis from property analytics company Cotality, an additional 25-basis-point increase would add approximately $110 a month to repayments on an average mortgage, taking the cumulative increase since January to roughly $550 per month.
Cotality’s research director, Tim Lawless, said: “Another 25-basis-point hike would take the average variable mortgage rate to around 6.7 per cent for owner-occupiers.
“Another rate hike would mean borrowing capacity has dropped by around 11.5 per cent, or more than $105,000 through the rate-hiking cycle to date,” he said, “more than offsetting the approximately $63,400 decline in the national median dwelling value since its March peak.”
The RBA will hand down its cash rate decision for the November cash rate at 2.30pm on Tuesday (3 November).
[Related: Banks recast rate hike forecasts to be harder and faster]
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