Reserve Bank of Australia Governor Michele Bullock is set to deliver her second interest rate decision tomorrow.
On October 4, the new Governor called a pause for Australia, leaving the cash rate at 4.1 per cent.
That had been widely expected by the market.
When Ms Bullock’s appointment was announced, the AUD didn’t really tremble, suggesting punters expected more of the same.
Things change quickly
But that situation has changed, and things can change quickly in the land of economic data.
In May of this year, the RBA expected interest rates to peak at 3.75 per cent.
They now stand at 4.1 per cent.
Commentary from the RBA has also gotten more hawkish in the last month – especially after the latest Australian inflation data surprised to the upside.
In fact, the inflation surprise was so strong, it turned some of the most bullish analysts around.
Turning bulls into bears
Especially City Index’s Matt Simpson.
“These numbers are simply pointing the wrong way,” Mr Simpson said.
“And that means the RBA’s November meeting is likely to be live, and the cash rate to be hiked to 4.35 per cent.”
Prior to the latest inflation data, Mr Simpson had staunchly been bullish on an extended pause – which Westpac also called in recent history, expecting that to remain the quo into 2024.
Westpac, too, has changed its mind.
Who’s calling a raise?
A wide range of analysts are expecting the RBA to raise rates on Melbourne Cup day.
Consider the list below.
- City Index – Senior Market Analyst Matt Simpson calls a 25bps hike.
- Oxford Economics – Head of Macroeconomic Forecasting Sean Langcake calls a 25bps hike.
- NAB – Currency Strategist Rodrigo Catril calls a 25bps hike.
- Morgan Stanley – Analysts call a 25bps hike.
- Westpac – Analysts call a 25bps hike.
A poll of economists conducted by Reuters also saw a majority of respondents call a 25bps hike tomorrow – 34 of 39 questioned.
In fact, it’s quite rapidly become very difficult to find anybody expecting a pause on November 7.
Shelter price question remains
Property prices – the largest upside catalyst for domestic inflation – remain high, too.
Given property premiums are a supply-side story, this situation is outside of the RBA’s remit.
Consider that recent data shows there are more Australians sharing homes under one roof than ever before in history – a metric called the person-to-house ratio.
Property investors dominate pricing
Also concerning is that first-time home buyers are being priced out of the market, according to recent ABS data.
While loan approvals for property investors continue to increase – in tandem with surging migration – first buyers remain suppressed.
This comes as Chinese investors are leading a post-lockdown boom in Australian property snatching, according to the Financial Review.
Shelter pressure challenges target
In other words: it’s entirely unclear how, exactly, housing prices will return to pre-COVID levels.
For many struggling families, prices were already too high before COVID.
The situation could, at its worst, end up with Australia looking a bit like the UK right now, where investors are increasingly betting the 2-3 per cent inflation target is an unattainable fantasy.