Will be the last rate rise?

Last week witnessed a 25-basis-point increase in the cash rate to 4.35%, marking the first such rise in five months. The Reserve Bank of Australia (RBA) took this step to address ongoing concerns about inflation. The decision, raising the cash rate to a 12-year high, reflects the RBA's 13th rate increase since May 2022.

Newly appointed Governor Michele Bullock and the board had previously signaled their readiness to resume rate hikes if inflation did not show the expected slowdown. Bullock reiterated the bank's preparedness to raise interest rates further if necessary, stating that while inflation in Australia has peaked, it remains persistently high. The latest data, considered since the August meeting, suggests an increased risk of prolonged elevated inflation.

Despite the economy experiencing a period of below-trend growth, it has been stronger than anticipated in the first half of the year. Labor market conditions have eased but remain tight, and housing prices continue to rise nationwide. Treasurer Jim Chalmers expressed concern about the impact on those already facing financial challenges, emphasizing that inflationary pressures extend beyond just petrol prices.

The 25-basis-point increase translates to an additional $100 in monthly repayments for a standard loan of approximately $600,000. Over the course of the rate-increase cycle, borrowers are expected to pay about $1,450 more each month to lenders, according to RateCity data.

The decision to raise rates was influenced by inflation figures for the September quarter, exceeding the RBA's predictions. The annual rate of price increases accelerated from 4.9% in July to 5.6% in September, surpassing the RBA's 2%-3% inflation target range for a record 10 quarters.

While the RBA's central forecast anticipates a decline in CPI inflation, progress appears slower than initially expected. Bullock projected CPI inflation to be around 3.5% by the end of 2024, reaching the top of the target range of 2% to 3% by the end of 2025. The need for further tightening of monetary policy will depend on evolving data and risk assessments.

Despite initial expectations, investors tempered speculation about another rate hike, as the language in this week's statement did not echo the October board meeting's suggestion of potential further tightening. Consequently, the Australian dollar experienced a decline, and shares ended trading 0.3% lower.

Attention is now directed at the September quarter wage price index figures, set for release on 15 November. A substantial increase in wages could prompt predictions of a consecutive rate rise when the RBA reconvenes on 5 December.

Acting shadow treasurer Jane Hume attributed the rate increase to a lack of government priorities and plans to address inflation and the cost of living over the past 17 months. On a positive note, the RBA expects a more moderate increase in the jobless rate, projecting a gradual rise to around 4.25%, lower than the previously expected 4.5% by mid-2025.

Economist David Bassanese anticipates the RBA's cautious approach, expecting a thorough assessment of inflation and growth trends in the coming months. He suggests a potential further rate rise in February if the consumer price index for the December quarter, scheduled for release on 31 January, remains uncomfortably high.

Among the major banks, only NAB continues to predict another rate increase, forecasting a 4.6% rate peak in February, with the December RBA meeting still considered "live."

By Nick Kerr