Last month, the Reserve Bank of Australia (RBA) broke the hearts of borrowers by increasing interest rates in an effort to tame inflation.
At the time, the market widely believed that one final hike would be required in order to get everything in order.
However, a lower-than-expected inflation reading last week has just thrown a spanner into the works.
So, with the RBA meeting next week, what action will the central bank take?
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Will the RBA increase interest rates?
Well, I have good news and bad news.
The good news is that the economics team at Westpac Banking Corp (ASX: WBC) believe that the RBA will be holding firm at Tuesday's meeting.
The bad news is that it isn't ruling out a hike at February's cash rate meeting.
According to the latest Westpac Weekly, its Chief Economist Luci Ellis commented:
Today we reaffirm our view that the RBA is unlikely to raise the cash rate at its December meeting. [I]nflation in October surprised a little on the downside. These data are noisy and neither the RBA nor we take full signal from a single monthly reading. Some of the biggest downside misses, such as for holiday travel, could reverse out. Moreover, most of the services components – which have been such a source of concern to the RBA – are not included in the first month of the quarter. We will not know how these are tracking until the November and December releases.
This brings us back to February's meeting. Westpac doesn't currently expect a hike to interest rates at that meeting but acknowledges that it cannot rule one out. Whether the RBA makes a move will ultimately be decided by the quarterly inflation reading that will be released in January. Ellis concludes:
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. If things play out broadly in line with their forecasts, though, further moves would be harder to justify. In that case, it would be likely that the RBA would hold the cash rate steady. Currently we believe this is the more likely outcome.
