Interest rate hike looms as RBA weighs inflation and global pressures

The Reserve Bank of Australia (RBA) is contemplating an interest rate hike, potentially pushing the decision by a month due to global backdrop influence. The cash rate has surged from 0.1% in April 2022 to 4.1% as of today. The decision, largely driven by the acceleration of inflation and RBA Governor Michele Bullock’s low tolerance for it, is expected to be announced on Melbourne Cup Day.

The inflation outlook remains uncertain due to external pressures such as oil prices and persistent services inflation. Risks include China’s slower than expected economic recovery, marked by an unexpected contraction in its manufacturing sector. Despite international pressures and resilience in the domestic economy, most economists believe the RBA has little choice but to continue hikes to ward off long-term inflationary expectations.

Global central banks like the US Federal Reserve, European Central Bank, and Bank of England are pausing interest rate hikes to evaluate the impact of previous monetary tightening measures. Amid this situation, Bullock might delay the interest rate hike at Tuesday’s board meeting, signaling an imminent rise but allowing time for people to accommodate higher borrowing costs.

Concurrently, Westpac notes minor business customer stress but strong domestic demand driven by infrastructure, energy transition, housing, immigration needs, and other economy demand drivers. This demand is leading to strong employment impact and mitigating high interest rates risk. The Australian mortgage book shows home loans 30+ days behind on repayments at 1.54% and those 90+ days behind at 0.86%, akin to pre-COVID levels when rates were lower.

The reaction of Canberra to potential rate hikes is also a factor under consideration. Last month, Treasurer Jim Chalmers hinted at the RBA keeping rates on hold, arguing that recent data aligns with expectations and doesn’t significantly alter the inflation forecast. If the rates are not raised now, a hike in December is nearly certain due to a long gap until their next meeting in February 2024.

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