Interest rates could be off and racing higher on Tuesday when the RBA meets, with other central banks in focus as well during the week.
Key Takeaways
- Reserve Bank of Australia meets on Tuesday in the wake of a larger than anticipated increase in the September quarter consumer price index
- The upside surprise in inflation could mean a cash rate increase of either 40 or 50 basis points
- There’s the prospect of a “jumbo” rate hike by the Bank of England, despite markets becoming more settled after the appointment of Rishi Sunak as Prime Minister
Next week is dominated by a series of important central bank meetings.
The Reserve Bank of Australia (RBA) meets on Tuesday in the wake of a larger than anticipated increase in the September quarter consumer price index (CPI).
The RBA minutes from the October meeting note that the decision between moving the policy rate by 25 basis points versus 50 basis points was “finely balanced”. The decision to increase by the lesser increment took the cash rate target at 2.6 per cent.
Arguments for 50 basis points centred on “the inflationary environment and risks to inflation expectations”, while arguments for 25 basis points “rested on the risks to global and domestic growth, and the potential for inflation to subside quickly”.
The notion that these judgements were “finely balanced” was reinforced by later comments from RBA deputy governor Michele Bullock, who left the door open for a return to higher (40 basis points or 50 basis points) policy rate increments by noting that “the size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market”.
In that context, the upside surprise in the September quarter CPI numbers should presage an increase in the size of the policy rate adjustment when the RBA Board meets next Tuesday – either 40 or 50 basis points. But as with last month, it remains a “fine judgement”.
Recent upside surprises in US inflation are expected to lead the Federal Reserve to announce a 75 basis point increase in the policy rate on Wednesday, taking the policy target to a 3.75 – 4 per cent range. Markets will be alert to any sign from the Federal Reserve that it may dial down the size of future policy rate increments.
Also important in shaping future policy rate expectations will be the key October non-farm payrolls report released on Friday, as well as high-frequency manufacturing and service industry institute of supply management (ISM) purchasing manager index (PMI) survey data. In particular, markets will focus on the price components ahead of the October CPI release the following week.
With UK markets having settled somewhat with the ascension of Rishi Sunak to the prime ministership, attention will revert to the Bank of England and the prospect of a “jumbo” policy rate hike. The Bank of England has been criticised in some quarters as appearing unwilling to assume a frontline role in the fight against inflation, currently exceeding 10 per cent on a headline basis. Even so, markets have dialled back their expectations of the policy rate increment from 100 basis points to something close to 75 basis points.
In the Eurozone, all eyes will be on provisional CPI inflation data to be released on Monday. Eurozone inflation has also been running uncomfortably close to 10 per cent. Were there to be little improvement in inflation, the already delicate balancing act by the European Central Bank in charting a course between that high inflation on the one hand, and the damage to activity growth from the Ukraine conflict and the impact of higher borrowing costs on heavily indebted members on the other, becomes that much more precarious.
Stephen Miller is an investment strategist at GSFM.