Bond traders are looking beyond next week’s Reserve Bank of Australia board meeting and ramping up bets that a cash rate above 5 per cent could well become a reality following a red-hot inflation report on Wednesday.
Money markets are pricing in an 88 per cent chance of the RBA lifting the cash rate to an 18-year high of 4.85 per cent at the November 3 meeting, up from a 69 per cent probability before the September-quarter Consumer Price Index showed prices rose faster than anticipated.
If the central bank does not tighten policy next week, pricing suggests it will be a done deal in December, followed by a strong chance of a sixth rate rise next year.
Barrenjoey chief interest rate strategist Andrew Lilley said a cash rate above 5 per cent hinged on the resilience of Australia’s jobs market.
Lilley’s assessment followed remarks from RBA governor Michele Bullock, who, shortly after the inflation figures were released on Wednesday, told legislators that employment looked “a little tighter” than previously thought.
Bullock indicated that the non-accelerating inflation rate of unemployment, or NAIRU – which is the lowest jobless rate an economy can sustain without stoking inflation – was likely to be higher than the current unemployment rate.
“If you revise NAIRU, then you would need to hike twice more to get inflation back to 2.5 per cent, rather than just once.” said Lilley.
Under that view, the labour market is still too tight for inflation to cool on its own as the central bank struggles to get on top of prices despite four rapid-fire rate rises this year to 4.6 per cent.
“The RBA has rewritten the script with the NAIRU change and may hike to 5.10 per cent,” said Lilley.
The rate strategist warned that if the unemployment rate of 4.7 per cent did not rise next month, the RBA could deliver back-to-back rate increases in November and December.
A cash rate of 5.1 per cent would be the highest level since the 2008 global financial crisis.
Investors will get a clearer picture on November 19 when the Australian Bureau of Statistics releases the October employment report.
Fortlake Asset Management founder and chief investment officer Christian Baylis agreed that monetary policy may need to turn considerably more aggressive.