RBA preview: Hawkish hold possible as inflation risks persist

Investing.com– The Reserve Bank of Australia is widely expected to keep interest rates on hold when it meets this Tuesday, although the bank’s signals on future rate hikes will be in close focus amid some stickiness in Australian inflation. 

The bank is set to keep its unchanged at 4.35% after a widely-expected 25 basis point hike in November. While a bulk of the RBA’s messaging during the meeting was seen as largely dovish, the bank warned that inflation risks still remained poised to the upside- a trend that could attract more rate hikes. 

Since November’s meeting, Governor Michele Bullock has consistently repeated her warning on a potential upside from demand-driven inflation. 

data showed recently that inflation eased in October, but remained comfortably above the RBA’s 2% to 3% target range. But core inflation- which excludes volatile items such as fresh food and fuel- remained elevated.

The RBA expects inflation to only fall within its range by mid-to-late 2025. 

Facets of the Australian economy- particularly the labor market and retail spending- appeared to have cooled in recent months. But whether this cooling was sufficient to draw a less hawkish stance from the RBA remained in doubt.

unexpectedly fell in October, recent data showed. But the Australian Bureau of Statistics warned that the drop was due to consumers holding off from spending during major discounting events in November- a trend that could potentially herald a strong reading for the month. 

The employment sector saw only marginal cooling in October, while purchasing managers index data showed a sustained decline in business activity. 

While cooling in certain facets of the Australian economy is likely to dissuade the RBA from raising interest rates again in December, the bank could still present a hawkish outlook on rates, particularly due its repeated warnings over an upside to inflation. 

The bank has hiked rates by a cumulative 410 bps over the past year, as it moved to control a post-COVID surge in inflation. But the RBA signaled a more data-driven approach to rate decisions in recent months.

Hold in December, hike in Feb?

Analysts at Westpac said that the RBA will be unwilling to hike rates again in December after a raise in the prior month, and that data prints released before December’s meeting provided little impetus to hike. 

The bank will likely keep rates on hold and continue to signal a data-driven approach to future hikes, with the bank’s February meeting presenting a more likely time for the RBA to consider a hike.

“By the time of the February meeting, the RBA will have the full December quarter inflation data as well as the September quarter national accounts and other key data. We reaffirm our view that the RBA Board would raise the cash rate at that meeting if it sees further upside surprises to inflation or fresh evidence suggesting that inflation will decline more slowly than it intends,” Luci Ellis, Chief Economist, Westpac Group, wrote in a recent note. 

The fell 0.2% on Monday, in anticipation of the meeting. But a bulk of the Aussie’s losses were driven by profit taking after stellar gains in November.