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Will RBA join the race to raise rates?

horses racing on a race track

The Reserve Bank of Australia (RBA) board meets next on Tuesday, 2 November. It's the day that Australia runs its most famous annual Thoroughbred horse race, the Melbourne Cup.

The question is whether all the bets that day will be on the horses or is a tweak to monetary policy on the cards?

USDCAD suffered overnight after the surprise Bank of Canada announcement that it would end immediately its quantitative easing (QE) program.

In its statement, Canada's central bank said that in the face of strong global demand for goods, pandemic-related disruptions to production and transportation were constraining growth. 

Inflation rates have increased in many countries, boosted by supply bottlenecks and by higher energy prices.

Fears the Reserve Bank of Australia could bring forward its plans to raise rates have come after an unexpected rise in the trimmed mean consumer price index, the RBA’s preferred inflation measure.

Underlying inflation rose 2.1% on an annual basis, edging inside the RBA's target range. It was the highest print in five years for core inflation, which strips out large one-off price impacts.

The Australian dollar rose to US75.36¢, within reach of a three-month high of US75.46¢. The Australian 3-year bond yield spiked as much as 19 basis points, climbing to 1% for the first time since 2019.

The Australian market is pricing in as many as three rate hikes between now and the end of 2022, much earlier than the RBA's guidance The official cash rate currently sits at a record low 0.1%.

RBA Governor Philip Lowe has insisted for months that inflation needs to be sustainably between its 2% to 3% target band before lifting the cash rate, and on its forecasts, it does not expect this to occur until 2024.

But analysts are watching inflation running ahead of the RBA's forecasts and saying conditions will be in place by late 2022 to start rate hikes.

“While it was possible that underlying inflationary pressures in Australia could build more quickly than currently envisaged, the central forecast scenario was still that domestic inflation would pick up only gradually over the medium term,” the RBA said in the minutes of its October meeting.

The RBA has effectively tied its QE purchases at $4bn a week until February, but analysts have forecast a move to $2bn a week in February, lowering to $1bn soon after and QE ending in September 2022.

Global concern

Policy makers across the globe are trying to understand if the inflationary pressures being seen are "transitory", linked to supply-chain disruptions or something more enduring.

The Reserve Bank of New Zealnd raised its official cash rate (OCR) by 25 basis points to 0.5% during its October 6 meeting, the first rate hike since June 2014, saying the decision was appropriate to maintain low inflation and support maximum employment.

The New Zealand dollar strengthened on the 18 October announcement that New Zealand consumer prices surged to almost 5% in the third quarter, compared with a central bank target in the middle of a 1-3% band.

Bond yields took off after the unexpectedly high inflation data in New Zealand and there is a growing expectations that the Bank of England will start lifting interest rates as soon as next month. Governor Andrew Bailey has said the British central bank will "have to act" against inflation.

Stockmarket impacts

Macquarie Equities has said rising bond yields could cause a sell-off in global sharemarkets prior to the Federal Open Market Committee (FOMC) meeting in the US on November 2 and 3.

Atlanta Federal Reserve President Raphael Bostic said in October that a sharp increase in prices in 2021 tied to the pandemic has broadened beyond just a handful of major goods such as autos and lumber and “will not be brief”.

US Federal Reserve Chairman Jerome Powell has insisted for months the increase was “transitory”, largely reflecting a surge in pent-up demand after the economy fully reopened, but recently admitted for the first time that inflation is likely to remain high well into next year.

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