2.60% cash rate confirmed

The Reserve Bank of Australia (RBA) delivered a 25-bp rate rise on Tuesday (4 October), following its board meeting for its monthly monetary policy decision.

The official cash rate is now 2.60 per cent.

Speaking after the board meeting, governor Philip Lowe said: "The board is committed to returning inflation to the 2–3 per cent range over time. Today’s increase in interest rates will help achieve this goal and further increases are likely to be required over the period ahead. The cash rate has been increased substantially in a short period of time.

"Reflecting this, the board decided to increase the cash rate by 25 basis points this month as it assesses the outlook for inflation and economic growth in Australia."

He added: "Today’s further increase in interest rates will help achieve a more sustainable balance of demand and supply in the Australian economy. This is necessary to bring inflation back down.

"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."

The October announcement follows on from 50-bp hikes in June, July, August and September, but economists were split as to exactly what would transpire.

Economists from Australia’s big four banks largely entertained a 50-bp increase this month — which would have made it an incredible 275 bps of tightening in just five months, over six meetings.

The move continues the central bank’s rate hiking cycle, which started in May (and continued with larger rate hikes more recently) as it attempts to curb rising inflation.

Most economists had agreed on a 50-bp rise, but some suggested that local conditions still could have enabled a lesser 25-bp hike.

For example, the Commonwealth Bank of Australia (CBA) had accurately predicted a lesser 25-bp hike for October soon after last month’s 50-bp increase, which it maintained pre-RBA announcement on Tuesday (4 October).

Its economists stated: “We expect a 25bp hike to 2.60 per cent, but recognise there is a clear risk the RBA opt for another out-sized 50bp increase.

“We ascribe a 60 per cent chance to a 25-bp hike and a 40 per cent chance to a 50-bp hike. We consider the risk of any other move immaterial.”

However, CBA continued: “The actions of many other central banks globally lends weight to the RBA opting for another 50bp hike.

“Such a move would mean the RBA has delivered an incredible 275bp of tightening in just five months, ie over six meetings.

“But we believe the domestic backdrop does not warrant another super-sized rate hike, particularly given the RBA has recently acknowledged that, ‘the full effects of higher interest rates are yet to be felt in mortgage payments’.

“A 25bp rate hike is policy tightening and in the RBA’s lexicon it is a ‘business as usual’ rate rise. 

“A slowdown in the pace of rate hikes should not be conflated with the direction of policy.  Any rate rise is policy tightening irrespective of whether the size of the hike is smaller than the previous one.”

ANZ called 50 bps

Australia and New Zealand Bank (ANZ) confirmed to Mortgage Business on Tuesday (4 October) that it expected “another 50” bp increase, which it said reflected, “...strength in recent domestic data, including solid household spending, ongoing inflation momentum and near-record job vacancies.”

“We also expected the RBA to ‘soften’ its message by removing the reference to “over the months ahead” in the context of further rate increases,” it explained.

NAB predicted 3.10 cash rate by end 2022

The National Australia Bank (NAB), in light of recent data and the RBA governor’s statement, had also said it was also confident a fifth consecutive 50-bp cash rate was to be announced today (4 October).

“We continue to expect a 25bp rise in November taking the cash rate to 3.10 per cent, which we see as a mildly contractionary policy setting,” the bank economists said.

“We still expect the RBA to pause the hiking cycle after November to assess the impact of rate hikes taken across 2022 and the evolution of inflation, the labour market, and the economy.

“We continue to expect GDP growth to slow in 2023 as higher rates weigh on consumers.

“Regardless, we see a 3.10 per cent rate at year-end as likely with the potential for a rise in December.”

Westpac can’t see the RBA scaling back rate rise

Speaking ahead of the rate announcement, Westpac economists said they expected the Reserve Bank of Australia to lift the cash rate by a further 50 bps today (4 October), after governor Philip Lowe suggested he was not yet ready to scale back the pace of tightening. 

“That would be the fifth consecutive 50bps increase, taking the rate to 2.85 per cent, and Westpac now sees a terminal rate of 3.6 per cent, up from its previous forecast of 3.35 per cent,” it explained.

The bank had noted that Mr Lowe’s recent comments last Friday (30 September) appeared to be more cautious than in his statement following the September board meeting.

“This could be significantly explained by the events in global markets following the US inflation report released on September 13,” Westpac chief economist Bill Evans said in a note.

That “surprisingly strong inflation result”, as well as “hawkish language from Fed chair Jerome Powell led to Westpac lifting its forecast for the terminal Fed funds rate to 4.125 per cent, from 3.375 per cent, it highlighted.

“While the Governor makes the point consistently that the Fed has a more urgent inflation challenge than the RBA due to much faster wage growth, he will take notice of such a sharp reassessment of the outlook for US interest rates and interest rates globally,” Mr Evans said.

Westpac now expects the RBA to dial down its tightening to 25-bp increments from November. 

Continued fast pace of rate hikes

Reacting to the rate decision, PropTrack senior economist Eleanor Creagh said the “fifth consecutive outsized increase and sixth consecutive hike” comes as the RBA board remains “committed to overcoming the challenge of high inflation and ensuring inflation psychology doesn’t set in”.

“The RBA has continued its fast pace of rate hikes in order to ensure inflation expectations remain anchored around its 2–3 per cent target,” she said.

“The board has indicated it may soon slow the pace of its tightening cycle, perhaps signalling that this may be the last outsized rate increase. However, this is not expected to be the last rate hike, merely a step down to a more measured pace.”

Early signs of labour force pressures easing

CreditorWatch’s chief economist Anneke Thompson added: “Global factors have played a key role in today’s decision by the Reserve Bank of Australia (RBA), as inflation continues to remain sticky in the US, and currency movements make inflation harder to tame in Australia.

“The US Federal Reserve hiked their interest rates another 75 basis points in September, and indicated they won’t stop until inflation is well under control there.

“This has raised the prospect of recession in the US considerably, and resulted in a downbeat mood amongst equity investors.

“Key indicators in Australia remained fairly stable, although there are very early signs of labour force pressures easing.”

Ms Thompson noted that the unemployment rate rose by 0.1 per cent to 3.5 per cent and the overall number of employed people also increased, while job vacancies declined on a seasonally adjusted basis for the first time since the onset of the pandemic.

“There are now 10,000 fewer jobs available in Australia [than] three months ago,” she said. 

“This is a forward indicator for unemployment, and coupled with increasing labour supply through migration, we may have already witnessed our trough in the unemployment rate. 

“Given strong employment has been such a key driver of consumers’ willingness to spend, the RBA will be watching this data closely. 

“If the unemployment rate does continue to ease, the RBA may choose to make more ‘wait and see’ decisions as we move through the remainder of 2022 and into 2023.”

[Related: Cash rate to hit 3.35% by Christmas: Macquarie]