We expect the RBA to keep the cash rate unchanged at 4.35% at the 5 November meeting. The benign Q3 CPI report removes any residual risk of further tightening in November. AUD weakness may reverse on FX positioning unwinds in the event of a Harris victory, Standard Chartered’s FX and Macro Strategist Nicholas Chia notes.
Comfortably on hold
“We expect the Reserve Bank of Australia (RBA) to maintain the cash rate at 4.35% on 5 November. The relatively benign Q3 CPI report strengthens our view for the RBA to remain on hold this year, with little impetus to change the policy rate in either direction. CPI inflation eased to 0.2% q/q in Q3 (Q2: +1%) amid an extension to the government’s energy rebates and lower oil prices (-7.4% q/q); on a y/y basis, inflation was at 2.8% (Q2: 3.8%). Trimmed mean CPI, the RBA’s preferred measure of underlying inflation, eased to 0.8% q/q in Q3 (Q2: +0.9%) and 3.5% y/y – an 11-quarter low (Q2: 4.0%).”
“The RBA is likely to judge that CPI disinflation remains on track, which removes any residual risk of a rate hike this year. However, the central bank is unlikely to ease policy soon, given that trimmed mean inflation (+3.5%) is still above its 2-3% target. The RBA may also be wary of any signs of an enduring rebound in inflation, such as the bounce in services inflation to 4.6% y/y in Q3 (Q2: 4.5%) partly due to base effects.”
“In terms of risks, the RBA may opt for a hawkish hold and bring back guidance that policy is “not sufficiently restrictive”, citing above-target underlying inflation for three straight years and persistent services inflation, which puts rate hikes back on the table. On the flip side, the RBA may drop the reference to ‘upside risks to inflation’ and ‘the Board is not ruling anything in or out’, suggesting that underlying inflation, while above-target, is trending in the right direction. It may also emphasise the recent weakness in household spending despite budgetary tax cuts. Both of these are not our baseline, but would be interpreted by markets as dovish, and therefore AUD-negative.”
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