Introduction to Interest Rates
The Reserve Bank’s rates decision is a crucial event for the economy, and many people are eagerly waiting to see what the bank will decide. However, according to financial markets, there’s less than an 8% chance of a rate cut, making it highly unlikely.
The Role of the Monetary Policy Board
The Monetary Policy Board’s statement will be closely watched for any hints about future decisions. The board’s decision to keep the cash rate steady at 3.6% will be explained, and analysts will look for clues about what might happen next month. The RBA governor’s press conference will also be closely watched, especially regarding the chances of a rate cut on Melbourne Cup Day.
The Impact of Inflation Data
A recent piece of data has significantly impacted the likelihood of a rate cut. The monthly Consumer Price Index Indicator, published by the Australian Bureau of Statistics, showed a surprising increase in inflation. Although the headline number only rose from 2.8 to 3%, the detail of the data showed that market services inflation is significantly hotter than expected. This has led some analysts to push back their forecast for the next rate cut until May.
Understanding the Monthly CPI Indicator
The monthly CPI indicator is a partial and unreliable figure that’s set to be replaced by a monthly full inflation figure from November 26. However, its latest release has driven a big market move, with the market pricing for the "terminal rate" jumping from 3.12 to 3.24%. This move suggests that the market is expecting fewer rate cuts to arrive. HSBC’s Australia chief economist, Paul Bloxham, noted that the monthly CPI indicator’s track record in predicting quarterly trimmed mean inflation is poor, with estimates based on the monthly CPI indicator almost always higher than the actual result.
Past Experiences with Monthly Inflation Data
The volatile monthly figures have foxed rates watchers in the recent past. In May, the monthly inflation data led to a scramble to price in a July rate cut, only for the RBA to leave rates on hold until August. Former RBA chief economist Luci Ellis warned against taking too much signal from the August partial inflation data, suggesting that it’s prudent to avoid over-weighting its implications.
Employment and Unemployment Rates
Another crucial factor for the RBA is the employment rate. The August jobs data showed unemployment at 4.2%, but 5,400 fewer people employed. The RBA has a dual mandate of price stability and full employment, and it sees "full employment" as an unemployment rate of about 4.5%. This means that there are still a few more Australians who need to be left out of work to make the RBA satisfied that workers are not going to gain excessive pay increases and rekindle inflation.
Conclusion
In conclusion, the Reserve Bank’s rates decision is a complex event with many factors at play. While the monthly CPI indicator has driven a big market move, its track record is poor, and it’s essential to consider other factors, such as employment and unemployment rates. The RBA governor’s press conference will be closely watched for any hints about future decisions, and the market will continue to speculate about the likelihood of rate cuts. Ultimately, the decision will depend on a range of factors, including inflation, employment, and the overall state of the economy.
