Inflation data will determine whether RBA delivers interest rate relief on Melbourne Cup Day

Investors are holding their breath for the latest batch of inflation data, which could make or break hopes of relief for mortgage holders on Melbourne Cup Day.

RBA governor Michele Bullock at the ABE annual dinner.

Australia’s highly anticipated inflation data could make or break the case for a restart of interest rate cuts by the Reserve Bank on Melbourne Cup Day.

The US Federal Reserve is widely expected to cut interest rates on Thursday, and the RBA board will take a close look at the latest developments in the US-China trade war when Presidents Donald Trump and Xi Jinping meet in South Korea.

But the release on Wednesday of Australia’s consumer price index for the September quarter is the last major economic data for the RBA board to consider before it makes its decision next Tuesday.

RBA governor Michele Bullock said on Tuesday that a 30 basis point miss on its core CPI forecast of 2.6 per cent would be a “quite material miss”, so don’t expect an interest rate cut next week if the trimmed mean prints at 2.9 per cent. The good news is that the market consensus is at 2.7 per cent.

While the RBA is currently targeting the “midpoint” of its 2-3 per cent inflation target, core inflation at 2.7 per cent is low enough for the Bank to restart interest rate cuts on Melbourne Cup Day on November 4.

That’s in the context of a potential need to provide some “insurance” against a downturn in the labour market and a self-reinforcing hit to consumer confidence after the unemployment rate for September unexpectedly jumped to a four-year high of 4.5 per cent.

To be sure, Bullock has downplayed the unemployment rate jump and talked up the inflation risks.

At the Australian Business Economists annual dinner on Tuesday, Bullock said she doesn’t want to “leap at a single number” when asked about the recent rise in the unemployment rate.

RBA governor Michele Bullock at the ABE annual dinner.

Bullock said the RBA board will have to decide whether it needs to cut interest rates in order to help the job market or whether it’s “a little more worried about the inflation rate”.

But overall, “we think we’re in a pretty good position” on jobs and inflation, she said.

Monetary policy was “still a little bit restrictive”, she added.

Market pricing on the amount of further rate cuts expected by the RBA fell by about 25 basis points last month after components of the monthly CPI indicator suggested that core “trimmed mean” inflation for the September quarter would be well above the RBA’s forecast of 2.6 per cent.

The market-implied chance of a cut this month spiked to 80 per cent, and the market went back to pricing in at least two more interest rate cuts after the unemployment rate jumped to 4.5 per cent.

But after subsequent hawkish communications from the RBA board and Bullock, the market was expecting less than two more interest rate cuts in Australia over the next 12 months.

The chance of a cut at next week’s board meeting fell from 60 per cent to 38 per cent after Bullock spoke on Tuesday, and a 25 basis point rate cut wasn’t fully priced in until the February meeting.

“With some remaining uncertainty over the inflation surprise to be resolved on Wednesday and the RBA willing to wait for a bit more data when referring to the labour market, we continue to see the cash rate on hold at the November meeting with the RBA taking some time to regain confidence that inflation will settle near 2.5 per cent,” said NAB head of Australian economics, Gareth Spence.

Inflation date is key to the RBA delivering another interest rate cut. Picture: John Gass/NCA NewsWire

But while an unchanged trimmed-mean inflation rate at 2.7 per cent could greenlight a November rate cut and a lower than expected outcome could fuel expectations of multiple rate cuts, a higher outcome would put a cut on hold, but wouldn’t scrap the chance of further rate cuts at this stage.

“Overall, we view governor Bullock’s comments around the labour market, services inflation and general cautiousness as continuing the less-dovish lean by the RBA over recent weeks and prior to the surprisingly large rise in the unemployment rate reported in September,” said Goldman Sachs chief economist Andrew Boak.