Reserve Bank tipped to deliver 25 basis point rate hike on Melbourne Cup Day

Economists are upping their bets on a Melbourne Cup rate hike, with the resilience in consumer spending continuing to thwart efforts to rein in inflation.

Economists are upping their bets that the Reserve Bank will deliver a Melbourne Cup interest rate hike on Tuesday. Picture: Carla Gottgens/Bloomberg

Economists are upping their bets that the Reserve Bank will deliver a Melbourne Cup interest rate hike on Tuesday, with the resilience in consumer spending continuing to thwart efforts to rein in inflation.

Higher than expected inflation figures and comments from RBA governor Michele Bullock about the bank’s “low tolerance” for a prolonged period of high inflation fuelled early predictions for a hike on Tuesday, and the latest data seems to have increased the likelihood of a further tightening.

Retail sales figures released on Friday by the ABS showed that sales volumes lifted by 0.2 per cent in the September quarter following three consecutive quarters of decline, led by an uptick in discretionary spending at department stores and on household goods, clothing and footwear.

With the International Monetary Fund weighing in last week with its own advice to the RBA to lift rates in order to ensure inflation returns to the bank’s target range by 2025, all signs are pointing to an interest rate rise on Tuesday.

Reserve Bank of Australia governor Michele Bullock. Picture: NCA NewsWire/Martin Ollman

The vast majority of economists, including those at the big four banks, are now pencilling in a 25 basis point hike to the cash rate, to 4.35 per cent, which would be the highest it‘s been since November 2011.

That’s despite pressure from Treasurer Jim Chalmers, who suggested September’s higher than expected annual inflation figure of 5.4 per cent did not represent a “material change” to the inflation outlook.

Speaking on Sunday, Dr Chalmers denied he was “jawboning” the RBA after commenting on economic forecasts last week, noting the RBA has “a job to do”.

“By the bizarre logic of some of that commentary, the Treasurer of Australia is not allowed to comment on the Treasury’s forecasts for inflation on the day that the inflation figures come out? I mean, that is, plainly and frankly, ridiculous,” Dr Chalmers said.

“No doubt, they have been working through the inflation data and weighing that up against the evidence that our economy is slowing, and some of this global uncertainty, and they’ll make their decision independently.”

Dr Chalmers also said on Sunday he was intending to announce a new RBA deputy governor before the central bank’s December rates meeting.

Independent economist Saul Eslake, who is also tipping a rate rise on Tuesday, believes the Treasurer’s comments could backfire on the government.

“Previous governors have responded to that kind of pressure from governments by raising rates when they might otherwise have done or by raising them by more than they would otherwise have done in order to make it clear that the Reserve Bank regards its independence zealously,” he said.

“It may be that some people around the table, possibly including Bullock herself, perceive a need under those circumstances to assert the Reserve Bank’s independence.”

Mr Eslake said there was an argument against raising rates, with other central banks around the world “willing to look through higher than expected inflation numbers” and leave rates unchanged.

Economist Saul Eslake. Picture: Chris Kidd

AMP chief economist Shane Oliver. Picture: Supplied

But AMP chief economist Shane Oliver said strong population growth strengthened a rate rise case.

“If you look over the last few weeks we’ve seen the Reserve Bank indicate a very low tolerance for a slower rate of decline than it’s been forecasting. We then saw the inflation numbers come in on the high side, and now we’ve seen stronger than expected retail sales,” he said.

Judo Bank adviser and EQ Economics principal Warren Hogan said if the RBA held rates flat it risked locking in higher inflation for longer.

Mr Hogan said the RBA should raise rates twice by February next year, with all evidence showing the current rates setting was not restrictive enough to jawbone inflation.

“The biggest failure is to let inflation and the economy get away from (the RBA) and eventually have to take the cash rate to 5.5 or 6 per cent,” he said.

Mr Hogan said governor Bullock “talks tough” but warned her “credibility is massively on the line” at the upcoming rates meeting.

“If you’re going to talk like a gunslinger, you’ve got to draw your gun and take a shot,” he said.

Mr Hogan said in light of recent economic news he was upgrading his forecasts for rates to peak at 4.6 per cent, up from an earlier view of terminal rates at 4.35 per cent.

The RBA has lifted the cash rate 12 times from its pandemic lows in April 2022, but has left them steady since July.

Mr Hogan said the risk now was the economy was less responsive to cash rate increases as less homeowners faced a cash crunch.

“Most economists had been worried because there’s so much household debt any rate hike could topple the economy, but it’s proving quite the opposite,” he said.

“It’s proving monetary policy is behaving normally or weaker because of all the baby boomers without mortgages and the savings buffer from the pandemic.”

Originally published as Reserve Bank tipped to deliver 25 basis point rate hike on Melbourne Cup Day