RBA Newsflash: November 2022

Updated November 1st 2022

In a call that could have gone each way, the central bank has announced a 25 basis points hike for its Melbourne Cup Day rate decision.

The Reserve Bank of Australia (RBA) has delivered a 25-bp rate rise, adding to the misery of all mortgage holders who may have lost money on today’s (1 November) Melbourne Cup race.

Following its monthly board meeting for its monetary policy decision on Tuesday afternoon (1 November), the RBA announced it was raising the official cash rate to 2.85 per cent.

The November announcement follows on from a 25-bp increase in October, which had itself been an anomaly following the 50bp rises announced in September, August and June.

It means that the cash rate has increased by 275 basis points since the rate rising cycle began in May 2022.

The move to increase the cash rate comes as the RBA attempts to curb rising inflation.

Major banks largely expected 25bp call

Leading into the November rate call, Australia’s big four banks had mostly expected a25-bp increase this month – bar Westpac, which touted a ramped-up 50-bp hit given local conditions and higher inflation.

It came after the Australian Bureau of Statistics (ABS) confirmed a 1.8 per cent rise in the Consumer Price Index (CPI) during the September quarter, taking annual inflation growth to 7.3 per cent — the highest level since the 1990s.

The September quarter inflation report has come as such a major surprise that we think the Reserve Bank board will decide to raise the cash rate by 50 bps at the next board meeting on November 1.

The best way for the central bank to break this nexus is to adopt strong rhetoric and strong action, citing evidence that pricing power is becoming widespread across expenditure items.

Additionally, he referenced last week’s budget papers, which suggested there could be a 50 per cent (or higher) increase in electricity prices in 2023.

The board should also be concerned about the unusual nature of this cycle as the economy emerges from the pandemic.

Highlighted that having announced a lower-than-expected 25 bp increase at the October meeting, the RBA now had “ample justification” for speeding up the pace of increases again in response to a significant upside shock to the inflation outlook.

Yet while many economists agreed that rates will increase in some way on Melbourne Cup Day, many others were less endeared to the 50bps view.

According to CBA, the RBA would deliver one or two more 25 bp rate hikes before pausing for an extended period. However, the bank acknowledged: “We expect the RBA to raise the cash rate by 25bp to 2.85 per cent at the November meeting. However, following last week’s upside inflation surprise there is a non a “non-trivial risk” that the RBA could opt for a larger 50 bp hike,” CBA said.

Ahead of the October board meeting we had ascribed a 60 per cent chance to a 25 bp hike and a 40 per cent chance to a 50 bp hike.

On the eve of the November announcement, both NAB and ANZ seemed to still side with it being only another 25 bps rise, as did AMP chief economist Shane Oliver who recognised the higher pressure on the RBA.

The rate movements will likely impact the housing market. The fastest rise to the cash rate since 1994 has quickly rebalanced the housing market from last year’s extreme growth levels, with prices falling from their peak nationally.

The latest PropTrack Home Price Index revealed that home prices stabilised in October, with national dwelling values falling just 0.06 per cent, the smallest fall since national home prices peaked in March 2022.

Prices nationally are now sitting 3.53 per cent below their March 2022 peak. As borrowing capacities are constrained and buyer’s’ budgets shrink, the most expensive markets of Sydney and Melbourne are leading the price declines, and in Sydney prices are down more than 6 per cent from peak and below levels recorded in October last year.

From here further rate rises will increase borrowing costs and reduce maximum borrowing capacities, weighing further on prices. However, this will be offset by tight rental markets and rental price pressures, rebounding foreign migration, low unemployment, and housing supply pressures.