Westpac’s Ellis says RBA clues could point to tightening
Westpac’s chief economist, Luci Ellis, has warned that a subtle change in language from the central bank’s last meeting implies it is prepared to increase interest rates if the inflation outlook drifts further from target.
Dr Ellis, former Reserve Bank assistant governor, doubts the policy path will play out this way, just as New Zealand’s inflation cooled more than expected in the second quarter, reinforcing bets that the New Zealand cash rate has peaked. Australia’s consumer price index for the September quarter is due next week.
Luci Ellis, Westpac’s chief economist. Alex Ellinghausen
Minutes of the RBA October meeting released on Tuesday showed the central bank was more inclined to raise interest rates than economists and traders thought, and the board has a “low tolerance for a slower return of inflation to target than currently expected”.
Dr Ellis said: “A significant upside surprise in the September quarter CPI release, along with further evidence that the real economy is proving more resilient than expected, might be enough to change their view and thus their decision. But this is not our central case at present.”
The October meeting preceded Hamas’ attacks on Israel and the rally in oil which may force the RBA to upgrade its inflation forecast “but we judge that this will not be enough to tilt the board’s hand”.
Costs relief
Across the Tasman, New Zealand annual consumer prices rose 5.6 per cent in the third quarter, from 6 per cent in the April to June period, below forecasts of a 5.9 per cent rise. The outcome will be encouraging for the Reserve Bank of New Zealand but has not fully extinguished tightening expectations.
“When you slice and dice the data, you get some pleasant surprises,” said Jarrod Kerr, chief economist at Kiwibank. More importantly, core inflation, the preferred measure of the RBNZ, cooled to 5.2 per cent from 6.1 per cent. “That’s a big move,” he said.
Traders trimmed the chance of an RBNZ interest rate increase in November to 17 per cent from 30 per cent ahead of the data. They ascribe a 50 per cent chance of one more lift by May next year as inflation still sits well above the central bank’s target of 1 per cent to 3 per cent.
The RBNZ has led the world in fighting inflation, lifting its cash rate in October 2021, about six months before the RBA.
The New Zealand dollar slipped 0.3 per cent to US59.10¢, and the Australian dollar climbed 0.6 per cent to $NZ1.0765, the best one-day return since July.
Disparate rate paths
The move was amplified after the RBA minutes highlighted the prospect of a diverging interest rate outlook between Australia and New Zealand.
“The minutes were more hawkish than recent RBA communications,” noted Tapas Strickland, head of market economics at NAB.
Traders are still unsure, ascribing just a one-in-three chance of a move to 4.35 per cent by December. But they materially ramped up bets of tightening by mid-next year and are fully priced for an increase by August 2024, from around 50 per cent on Monday.
Jobs data for September will be released on Thursday.
The RBA forecasts inflation to return to its 2 per cent to 3 per cent target band by late 2025.
Dr Ellis said the text of the minutes and reference to “whether or not a further increase in interest rates is required” in the final paragraph is instructive. “It reads as a deliberate pointer to the board’s assessment that it would only need to tighten further in the event of an upside surprise,” she said.
“It is hard to expect next week’s quarterly inflation report will show a material slowdown because inflationary pressures are not easing on most fronts and expectations are still elevated,” said Greg Stock, a senior portfolio manager at Perpetual. He predicts the Reserve Bank will lift interest rates at least once more. “The question is when?”
He is not alone. NAB expects core inflation will show a high enough reading when it is released next week to push the RBA to lift the cash rate to 4.35 per cent in November. NAB forecasts core CPI to gain 1.1 per cent quarter-on-quarter, against the RBA’s projection of 0.9 per cent.
CBA, ANZ and Westpac forecast the policy rate will stay on hold.
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