The Reserve Bank of Australia’s Governor has made the case her own data set up. Appearing before a Senate economics committee on Wednesday, as the September quarter inflation figures landed, Michele Bullock said some of the upside risks identified in the bank’s August forecasts had since materialised, that inflation will therefore likely be higher than the August base case, and that the Board will debate next week whether four rate hikes this year will prove sufficient to return inflation to target, Reuters reported.
Her reasoning closes the dovish exits one by one. Global energy prices are now much higher than the RBA assumed in August after the re-escalation of the Middle East conflict, adding to inflation directly and through transport costs, and short term inflation expectations are elevated. The labour market, she said, looks a little tighter than previously judged, despite unemployment rising more than expected to 4.7 percent, with elevated underlying inflation tied to domestic demand exceeding supply. After the data she added that inflation is far too high and that the bank cannot completely disregard inflation caused by supply shocks, while declining to give guidance on the decision.
The data she was reacting to is yesterday’s story on this site: headline CPI up 4.3 percent in the year to September, and the trimmed mean, the bank’s main gauge of underlying inflation, up 1.0 percent in the quarter, above the roughly 0.8 percent quarterly pace implied by the August forecasts.
The forecast split broke the same day. Commonwealth Bank changed its call to a hike, expecting the cash rate to rise to 4.85 percent when the Monetary Policy Board concludes its meeting on November 3. CBA’s head of Australian economics, Belinda Allen, framed it as an insurance hike: recent RBA communication suggests four hikes are not enough, and the bank’s reassessment of domestic capacity pressure, including weak productivity limiting how fast the economy can grow without generating inflation, drove the change. ANZ and Westpac already expected a fifth rise; Westpac’s analysts wrote that the staff would likely recommend an increase, with a majority of external members expected to agree and some dissent possible. Market pricing moved to around 75 percent for a November hike. AUD/USD stood at 0.7031 in this site’s tables, up 0.16 percent on the day.