Market Insight – RBA Preview

The Reserve Bank of Australia is expected to hike by 25 basis and bring the cash rate to 3.10%. The RBA stated that it’s not on a pre-set path regarding rate hikes and that it can switch to more aggressive hikes if necessary.

The Australian central bank remain data dependent but not showing signs of urgency in increasing the size of rate hikes even though the last inflation report surprised to the upside.

The annual inflation rate in Australia climbed to 7.3% in Q3 of 2022 from 6.1% in Q2, above market forecasts of 7.0%. This was the highest print since Q2 1990, boosted by higher prices for new dwelling construction, automotive fuel, and food. Prices of food rose the most since Q4 1983.

Last month the board reiterated that it remained resolute in its commitment to bring inflation to target levels and will do what is necessary to achieve that. The size and timing of rate increases will be determined by the incoming data.

The board also increased the interest rate on Exchange Settlement balances by 25bps to 2.75%. The committee added that it now saw inflation peaking around 8% this year, compared with its previous forecasts of 7.75%.

In terms of market forecasts Scotia bank also holds a consensus view that the central bank of Australia will deliver with a 25 basis point hike.

The note that “Almost all of consensus expects a 25bps rate hike. Markets are less certain and have about half of a quarter-point rise priced and another half point of rate hikes priced over 2023 H1.”

They also state that “The RBA downshifted the pace of rate increases to 25bps at the October meeting when consensus expected 50bps. Tail risks are more skewed toward passing rather than upshifting the pace again. Wage pressures have intensified.”

Expect plenty of price volatility in the AUDUSD and AUDNZD pairs. Notably the RBNZ is more aggressive than the RBA so this pair.