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RBA hikes interest rate to a 12-year high of 4.35% in November

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The Reserve Bank of Australia (RBA) board members decided to raise the Official Cash Rate (OCR) from 4.10% to 4.35%, following the conclusion of the November monetary policy meeting on Tuesday.

The RBA’s ninth governor, Michele Bullock, presented the monetary policy statement, with the key highlights noted below. Board remains resolute in its determination to return inflation to target. CPI inflation is now expected to be around 3½% by the end of 2024 and at the top of the target range of 2 to 3 per cent by the end of 2025.

RBA Hikes Interest Rate

Board judged an increase in interest rates was warranted today to be more assured that inflation would return to target in a reasonable timeframe. Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable time frame will depend upon the data and the evolving assessment of risks. Still significant uncertainties around the outlook. Services price inflation has been surprisingly persistent overseas and the same could occur in Australia. 

To date, medium-term inflation expectations have been consistent with the inflation target and it is important that this remains the case. High inflation is weighing on people’s real incomes and household consumption growth is weak, as is dwelling investment. Wages growth has picked up over the past year but is still consistent with the inflation target, provided that productivity growth picks up. 

Weight of information suggests that the risk of inflation remaining higher for longer has increased. Reserve Bank of Australia set to resume interest-rate hikes.  The current market positioning suggests that a 25 basis points (bps) increase to the Reserve Bank of Australia’s Official Cash Rate (OCR) is fully baked on Tuesday. 

The decision will be announced at 03:30 GMT, with the RBA expected to lift the interest rate from 4.10% to 4.35% after a four-month hiatus from the tightening cycle. The big four Australian banks, ANZ, CBA, Westpac and NAB, revised their call for an RBA rate hike, following the resurgence of inflation and hawkish commentary from the RBA policymakers. 

Data from the Australian Bureau of Statistics (ABS) showed the Consumer Price Index (CPI) rose 1.2% in the third quarter, above market forecasts of 1.1% and up from a 0.8% increase the previous quarter. 

For September alone, the CPI rose 5.6% year-on-year, up from 5.2% in August. A closely-watched measure of core CPI, the trimmed mean, rose 1.2% in the third quarter, topping expectations of 1.1%. Meanwhile, Australian Retail Sales rose for the first time in four quarters in the July-September period, rebounding 0.2% QoQ as against the previous drop of 0.6%. Despite signs of a cooling Australian labour market, robust consumer spending supports the case for the RBA to resume interest rate hikes. Commenting on the inflation data, Reserve Bank of Australia (RBA) Governor Michele Bullock said that goods prices are coming down but services inflation remains persistent.

 “Services inflation is higher than what we are comfortable with,” she said. Bullock had mentioned last month, “[the RBA’s] board will not hesitate to raise rates if there is a material upward revision to the inflation outlook.” Christopher Kent, the RBA’s assistant governor of financial markets, had said at a Bloomberg event in early October, the board “may need to raise interest rates in the future to bring inflation down. I think that’s a reflection of the fact that we wouldn’t want it to be much slower.

” Previewing the RBA policy decision, analysts at BBH said, “Reserve Bank of Australia meets Tuesday and is expected to hike rates 25 bp to 4.35%. A handful of analysts polled by Bloomberg look for steady rates, while World Interest Rate Probabilities (WIRP) suggest 50% odds. Those odds rise to 75% for December 5 and full priced in for February 6, with odds of a second hike topping out near 35% in Q2 2024.”

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