RBA Hiking to 4.25%
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Bottom Line: RBA will raise the cash rate in the coming Nov. 7 meeting as Q3 inflation spiked on higher energy prices. While most market participants are expecting a 25bps hike, we forecast a 15bps hike would be a more balanced option. The flare in inflation from energy price is unlikely to be sustained and we seeing a turn in the Australian labor market. The low household saving ration will dampen consumption growth and thus any tightening from the RBA must be executed carefully. A 15bps raise would be a balanced option to tame inflation without further damaging the economy.
The Q3 Australian q/q CPI has spiked to 1.2% from 0.8% in Q2 along with RBA trimmed mean CPI showing 1.2% growth from 1% in Q2. There is also evidence in monthly CPI that inflation is indeed higher in consecutive months because of higher energy prices. The RBA has stated that Australian inflation remains high but has peaked and it remains true. We do not expect continual strength of inflation as cumulative tightening takes its effect on the economy and high energy price driven inflationary pressure does not look sustainable. With slowing labor market and consumption growth, there is limited room for the RBA to further tightening without sacrificing ny economic growth. Therefore, RBA will likely bring rates to 4.25% to signal market participants RBA will not hesitate to step in if inflation runs hot but will be carefully assess inflation and economics dynamics.
The housing market has corrected and dampened consumption activity for new households, as well as residential investment. It remains under pressure despite the rebound in housing price as household balance sheet continues to be restrained by high mortgage cost. Financial conditions had significantly tightened for business since the beginning of tightening cycle and see business outlook stay depressed. These are also key factors for RBA to consider if they would like to keep the economy afloat.
The Australian labor market lingers below historically high and has shown a turn in the past months. The unemployment rate stays low at 3.6% but participation rate has also rotated lower to 66.7% in September from 67% in prior months. Moreover, full time jobs have decreased in consecutive and part time jobs grew. The slowing in employment growth with steadily high vacancies is suggesting the maximum capacity in labor has met and unemployment rate is forecast to be at 4.5% in late 2024. The momentum is expected to keep a steady pace in the coming quarters.
The Australian economic growth will slow further in 2024 as private consumption is going to fall significantly on very low household saving rate and negative real wage growth. Therefore, we see the RBA hiking by 15bps to a terminal rate of 4.25% in November 2023 as a gesture of commitment to keep inflation in check rather restarting the tightening cycle.