RBA tea leaves point to another 25bps hike on Melbourne Cup Day

The market appears to have placed an odds-on bet ahead of Melbourne Cup Day that the Reserve Bank’s (RBA) next rate hike, when it meets on that fateful first Tuesday in November, will again be 25bps.

Having tried to decipher the tea leaves within the central bank’s rhetoric from recently released October board meeting minutes, the market appears to be in broad agreement on what the central bank's recent step-change means for future increases.

While uncertainty on the rate outlook remains, the central bank has reiterated that further rate increases are necessary.

What's on the RBA's mind?

Within its October meeting notes, the board argued that a 25bps increase – which bucked the global trend by slowing the pace of interest rate rises - was justified and drew the following conclusions:

• The full effects of higher interest rates were yet to be felt in mortgage payments.

• Increases in the cash rate were close to the interest rate buffer applied when many current borrowers took out their loans.

• Tightening of monetary policy was having a clear effect in the housing market, where prices had declined after earlier large increases.

• Demand for housing loans had also fallen.

• Increased difficulty finding workers meant that this strong labour demand was likely to result in a further lift in wages growth in coming months.

• The rental crisis affecting much of the country was contributing to high inflation.

• A further increase in the cash rate was necessary to achieve a more sustainable balance of demand and supply in the Australian economy.

• Arguments for the change in pace “were finally balanced”.

The RBA acknowledged the mounting pressure higher rates were placing on households and that variable-rate borrowers with low incomes, small liquidity buffers and high debt were most vulnerable to mortgage payment difficulties.

What will happen in November?

Given that the RBA’s surprise 25bps rate rise in October ignited the biggest share market rally in two years, a decision to follow suite in November could again lift a market desperate for good news.

With the October minutes having highlighted the discussion around domestic risks – notably of a market overcorrection - ANZ Bank (ASX: ANZ) believes the RBA is hinting at another 25bps in November, and RBC Capital Markets has reached a similar conclusion.

The Commonwealth Bank (ASX: CBA), which accurately tipped the October rise, also expects one more 25-point rise to 2.85% before the RBA starts cutting rates next year.

Meantime, while September quarter CPI numbers coincide with Albanese government’s first budget, 26 October, the RBA’s “central forecast” is for the consumer prices index to reach 7.75% by the end of the year before falling to “a little over 4% over 2023 and around 3% over 2024”.