RBA should hike in November on higher inflation
Underlying inflation is tracking well above the RBA's forecast profile
The RBA board should hike in November because underlying inflation is tracking well above the RBA’s forecast profile.
The RBA meets on 7 November and seems likely to resume raising rates, increasing the cash rate by 25bp to 4.35% in response to a “material” upside surprise to underlying inflation.
The trimmed mean CPI, which is the RBA’s preferred measure of underlying inflation, rose by 1.2% in Q3 after an upwardly-revised increase of 1.0% in Q2 (previously 0.9%), with the monthly CPI pointing to a 1.1% increase in Q4 if the ex-volatile/transport CPI continues to grow at the same rate over the next few months as it did in September.
These outcomes and estimated trajectory are both well above the RBA’s current forecast profile that staff will update over the next week or so.
That is, in August, the RBA had a 0.9% starting point for the Q2 trimmed mean CPI and were implicitly forecasting quarterly increases of 0.9% in Q3 and 0.8% in Q4, such that annual underlying inflation had been expected to slow to 3.9% by the end of this year.
Instead, based on today’s numbers and the assumption that monthly inflation holds steady at its September pace, annual underlying inflation looks likely to end the year at about 4½%.
There is still some lingering uncertainty over whether Governor Bullock will follow her predecessor in failing to match tough talk on inflation with higher interest rates, although given she has been explicit this week in expressing concern about upside risks to inflation, policy inaction would dent the RBA’s credibility.
Note that Governor Bullock has the opportunity to signal her policy preference to the market in tomorrow's parliamentary testimony.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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