'Inflation in Australia is too high': RBA has two more rate hikes to go

Lowe has giveth and taketh in equal measure. The RBA was one of the first central banks to downshift their pace of rate hikes back in October to then raise rates by another 25 basis points on Tuesday and more importantly, signal that there's more to come.

It's funny how the tables have turned with the now hawkish Lowe suggesting "inflation in Australia is too high" and that the board expects to "increase interest rates further over the period ahead."

On the flip side, it's now Fed Chair Jerome Powell saying that "the time for moderating the pace of rate increases may come as soon as the December meeting." A big U-turn from previous views of aggressive hiking until the job is done and how rates have 'a ways to go'.

Another two 25 bp hikes to come

Morgan Stanley expects to see another two 25 bp hikes in the first quarter of 2023, taking the cash rate to 3.6%. It would represent the most aggressive rate hike cycle since 1990, when the cash rate was first introduced.

Source: AMP

"As we noted in our preview, data over the past month had been mixed, with inflation surprising to the downside but wages and unemployment beating," Morgan Stanley said in a note on Tuesday.

"... the RBA is no longer highlighting that wage growth is lower than in other economies – with a wage price spiral still a key concern."

The next RBA meeting is scheduled for 7 February 2023, which leaves plenty of time to absorb several data points around inflation, labour market and retail spending, according to Morgan Stanley.

"While we expect some deterioration in the coming months, we don’t think there will be sufficient evidence to see a shift from the RBA's base case of further tightening."

Unstoppable wage growth

Compensation of employees (COE) rose 3.2% in the September quarter, the strongest rise since 2006, according to the ABS.

"Wage pressures continue to build from skilled labour shortages, resulting in businesses paying more to attract and retain staff and is reflected in average COE per employee up 2.5%," the ABS said on Wednesday.

Source: ABS

"Data suggest price pressures may be slowly easing; though with wages accelerating, inflation will remain elevated for some time," said BMO Economics.

Higher for how much longer

There's quite a diverging view among Australian and US rate futures.

The ASX 30 day interbank futures illustrate a higher for longer narrative, where rates are expected to sit around 3.6% through to 2024.

Source: ASX

Over in the US, the market is pricing the Fed another 50 bps in December and another two-and-a-half 25 bp hikes for a peak of 5.0% in July. But what's interesting is that 50 bps of cuts is priced in for the second half of 2023.

The market's refuting the idea of 'higher for longer' as it believes in a ... recession.