- Westpac expects another RBA cash rate hike in November, arguing the central bank's latest messaging suggests a follow-up increase is now the base case.
- While this week's 25-basis-point hike to 4.6% was widely expected, economists say the accompanying statement appeared to signal greater concern about inflationary pressures.
- Rising oil prices and recent economic data have fuelled RBA fears that inflation could reaccelerate.
Borrowers hoping September's interest rate increase would be a one-off may be disappointed, with Westpac saying another Reserve Bank rate hike in November is now the most likely outcome as energy prices and domestic inflation risks re-emerge.
The Reserve Bank of Australia lifted the cash rate by 25 basis points to 4.6% at its September meeting, a move widely anticipated by financial markets.
READ MORE: RBA raises cash rate to 4.60%
Westpac joins ANZ as the second major bank to forecast another rate increase in November.
According to the Westpac, the bigger development was the central bank's messaging which, it said, has effectively shifted expectations towards a follow-up tightening move before the end of the year.
In her post-meeting analysis, Westpac chief economist Luci Ellis said the RBA's latest messaging suggested a follow-up rate rise in November had become the most likely outcome.
This marks a significant change from August, when an extended hold of the cash rate appeared the most likely path.
Hiking cycle may not be over
Few economists were surprised by the September increase.
The more consequential development was the RBA's shift in tone, which suggested the central bank is becoming increasingly concerned about renewed inflationary pressures, both internationally and domestically.
Its post-meeting statement emphasised conflict in the Middle East had driven global energy prices "much higher" than assumed in its August forecasts.
According to Dr Ellis, the language was stronger than typically seen in RBA communications and pointed to growing concern that higher oil and energy prices could flow through to broader inflation.
"The bar for a follow-up hike in November is low. Indeed, judging by [Tuesday's] rhetoric, a November hike is now the base case," she wrote.
A dramatic change in direction
The latest decision represents a notable turnaround from the RBA's August meeting.
At the time, incoming data had weakened the case for additional tightening and the central bank's published forecasts did not support further rate rises.
However, Dr Ellis said policymakers can now point to some of the upside inflation risks they flagged in August beginning to emerge.
Stronger-than-expected June quarter GDP figures and firmer July inflation data have reinforced concerns that demand continues to outstrip supply across parts of the economy.
August inflation data - released the day after the RBA's decision - shows headline inflation at 4.0% (up from 3.5% the previous month) and unchanged underlying inflation of 3.6%.
The Monetary Policy Board's decision to raise rates was also unanimous which, Dr Ellis said, suggested worries about higher oil prices and stronger-than-expected economic data outweighed any reservations about slowing activity elsewhere.
Why the Middle East matters to Australian borrowers
While overseas conflicts might seem far removed from Australian households, the impact can quickly reach mortgage holders through inflation and interest rates.
Higher energy prices increase costs for transport operators, manufacturers and businesses, which can then be passed on to consumers through higher prices.
In her analysis, Dr Ellis noted the RBA's business liaison program indicated many firms were already passing on higher energy costs or planning to do so.
The central bank said any pass-through would add to existing domestic inflation pressures linked to capacity constraints in the economy.
The AI inflation factor
Another issue drawing the central bank's attention is the rapid expansion of AI infrastructure and data centres.
The RBA cited the inflationary potential of higher construction costs and increased retail prices for technology goods as demand for AI-related infrastructure grows.
However, RBA governor Michele Bullock indicated during her post-meeting media conference that those pressures were still building rather than materially affecting inflation today.
For now, Dr Ellis suggested the central bank appears more focused on energy costs and recent inflation data than AI-related pressures.
Some signs of economic cooling remain
However, not every indicator is pointing to more rate rises.
The RBA's statement omitted previous references to the labour market being particularly tight, despite officials' comments meetings that jobs market conditions remained firm.
See also: More Australians looking for work pushes unemployment rate to 4.6%
Instead, the board said labour market conditions were easing "broadly as expected", even though unemployment has already moved above the level forecast in the RBA's August Statement on Monetary Policy.
While Westpac now expects the RBA to raise rates again in November, it said the hurdle for additional tightening beyond that remains considerably higher, citing easing labour market conditions and the cumulative effect of past rate rises on the economy and housing sector.
The RBA's next meeting on the cash rate is scheduled for 2-3 November with its decision to be handed down on Melbourne Cup Day.