An interest rate increase – the fifth this year – is a near-certainty to be announced this afternoon, piling yet more pressure on households with a mortgage in the midst of a cost-of-living crisis.
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Inflation not yet close to under control
The Reserve Bank of Australia increased the official interest rate in February, March, May, and September, by 25 basis points each time, in a bid to bring inflation back under control.
But Reserve Bank of Australia Governor Michele Bullock, in a statement to Senate Estimates last week, said that inflation looked likely to stay high.
The Governor said:
Recently, inflation has been around 3½ to 4 per cent in year-ended terms. The increase in inflation reflects both persistent capacity pressures in the Australian economy and global cost pressures associated with the conflict in the Middle East. Because of both these factors, inflation is likely to remain elevated for some time.
Ms Bullock said that the RBA did not expect inflation to retreat to the target band of 2% to 3% until late 2027, and added that risks of this not happening were "skewed to the upside".
A lot of this risk was international, with the conflict in the Middle East keeping energy prices "much higher" than the RBA had forecast in August.
Ms Bullock added:
Oil and related prices have increased sharply again and will add materially to inflation, both directly and indirectly as businesses facing increasing pressures from higher transport and related costs attempt to pass them on. At the same time, short-term inflation expectations are elevated.
Where to from here for interest rates?
Given all of these risks raised by Ms Bullock, it's worth asking whether there will be more rate rises next year.
Analysts are cautiously predicting that today's increase will be the last; however, they are not confident in this prediction.
Canaccord Genuity, in a report released on 2 November, said they expected the November increase to be the last before an extended hold, "although the risk of further tightening is not insignificant''.
The broker has said there is roughly a 30% chance of another rate increase in the first half of calendar 2027.
CG said there had been tentative signs of moderating price pressures, with growth in new dwelling prices easing in the third quarter, and house prices overall falling 8% from their peak.
The broker said National Australia Bank Ltd (ASX: NAB)'s business conditions monitor had also turned negative.
AMP Chief Economist Dr Shane Oliver said in a note published on 2 November that he saw the official cash rate peaking at 4.85% after today's expected rise, but added that "the risk of further hikes is high".
He added:
In any case RBA commentary is likely to continue to lean hawkish warning of more hikes to come for a while yet and we don't see it cutting rates until the December quarter next year. So, absent a crisis, rate relief is a long way off.
Foolish Takeaway
Interest rate increases take a while to slow the economy down. I'm betting the RBA will sit on its hands for quite a few months at least before even considering another interest rate rise.
