After the Fed's rate hike, is the Reserve Bank of Australia preparing to act consecutively? Market focuses on "restarting rate hikes in September, and another increase in November."

Title context: After the Fed's rate hike, is the Reserve Bank of Australia preparing to act consecutively? Market focuses on "restarting rate hikes in September, and another increase in November." Text: The core choice facing the Reserve Bank of Australia (RBA) is whether to follow the Federal Reserve and other global central banks in further tightening policy, at a time when inflation remains above target and energy costs are rising again, even though the housing and labor markets are already showing signs of cooling. According to a survey of economists by an institution, the market expects the RBA to raise the cash rate by 25 basis points to 4.6% on September 29, the highest level since November 2011; the more important disagreement is whether another hike to 4.85% will be needed in November. Factors supporting tightening expectations include inflation and economic growth data exceeding expectations, as well as erosion of business confidence in the central bank's ability to restore price stability. Data from the Australian Bureau of Statistics show that headline CPI rose 3.5% year-on-year in July, while the trimmed mean inflation rate was 3.6%, both above the 2%-3% target range; although headline inflation eased from June year-on-year, core inflation did not decline further. As of now, the cash rate remains at 4.35%, and this rate hike has not yet taken effect. RBA expected to restart rate hikes, global high-rate pressure continues to build The Federal Reserve's return to a rate-hiking path places Australia's policy dilemma within a broader global repricing of interest rates. It is worth noting that the RBA embraced the rate-hiking cycle earlier than the Federal Reserve, the Bank of Japan and other central banks. The RBA raised rates by 25 basis points each in February, March and May this year, for a cumulative 75 basis points, lifting the cash rate from 3.60% to 4.35%; the Federal Reserve only restarted rate hikes on September 16. The Federal Reserve had previously raised rates by 25 basis points on September 16, lifting the policy rate range to 3.75%-4.00%. A Charles Schwab analysis on September 25 showed that federal funds futures at the time priced in close to three additional rate hikes through June 2027. Long-term Treasury yields reflect the future path of short-term rates and term premiums, so even if central banks have not yet implemented subsequent hikes, the market will adjust long-term funding prices in advance. Charles Schwab's analyst team, citing an analytical model from the New York Fed, pointed out that this year's rise in 10-year U.S. Treasury yields mainly came from upward revisions to expected short-term rates, rather than being driven by term premiums, which is enough to show that the market is reassessing how high and how long policy rates must remain to suppress inflation. This repricing has already been reflected in long-end rates in the United States and Australia. During New York trading on September 25, 10-year and 30-year U.S. Treasury yields briefly touched about 5.23% and 5.53%, respectively, the highest levels since 2007 and 2004, before falling back to about 5.16% and 5.49%. On the same day, over-the-counter interbank quotes compiled by Trading Economics showed that 10-year and 30-year Australian government bond yields were about 5.40% and 5.75%, respectively, up about 38 basis points and 18 basis points over the past month. Long-end rates in both countries are under pressure from energy inflation and upward revisions to the policy path, but Australia also has its own sticky core inflation and expectations of another rate hike. From pause to renewed tightening? Patience with high inflation is wearing thin, RBA expected to restart rate hikes As policymakers gradually lose patience with persistently high inflation, Australia's central bank is expected to restart rate hikes on Tuesday, and debate is heating up over whether further increases will be needed afterward. According to a survey of economists by an institution, the RBA's nine-member monetary policy committee will raise the cash rate by 0.25 percentage points to 4.6% in a decision to be announced at 2:30 p.m. Sydney time, the highest level since November 2011. Against the backdrop of a sharp rise in global energy prices, traders are also pricing in an end to the RBA's pause after two consecutive meetings. Investors will closely watch the rate statement and Governor Michele Bullock's press conference an hour later. They will look for clues as to whether the RBA is prepared to keep raising rates in November, creating a pace of two consecutive meetings of hikes, or whether it prefers to stay on hold for the rest of the year. Belinda Allen, head of Australian economic research at Commonwealth Bank of Australia, said: "Given the inflation backdrop, the risk is that further monetary policy tightening will still be needed after September. But further increasing the restrictiveness of monetary policy is not an easy decision to make." As shown in the chart above, the RBA is expected to restart rate hikes, with multiple global central banks tightening policy in sync, and Australia may raise rates to 4.6% in September. Signs that the RBA is restarting policy tightening can be traced back to its unexpectedly hawkish August meeting minutes. In those minutes, which leaned toward tightening, the divided policy committee listed three key data points to focus on before its September 28-29 meeting: July monthly inflation data: both headline and core inflation exceeded expectations Second-quarter GDP: growth exceeded expectations August employment data: the unemployment rate rose for two consecutive months Accordingly, two of the three data points moved in a direction unfavorable to cooling inflation. This series of stronger-than-expected data was accompanied by increasingly hawkish policy communication from the central bank. Senior officials repeatedly stressed that their tolerance for persistently high inflation is very low and that they are willing to raise rates again if necessary. They also expressed concern about whether inflation expectations can return to the 2%-3% target range. Bullock reminded a parliamentary committee that a view was beginning to "bubble up" in the business community that the RBA cannot bring CPI growth below 3%. As shown in the chart above, Australia's inflation rate is clearly above the central bank's target - price increases have become the "top concern" before the RBA's September 28-29 meeting. Note: The dashed line represents the upper bound of the RBA's 2%-3% inflation target range. Source: Australian Bureau of Statistics Robert Thompson of RBC Capital Markets said after Bullock's September 18 testimony that the policy signal from officials was so strong that it "leaves us with little doubt that insiders at the central bank have already made up their minds - a September rate hike is the necessary action." RBC expects another rate hike in November, taking the cash rate to 4.85%, the highest level since November 2008. The RBA took aggressive rate action early in the year, raising rates at each of its first three meetings, and has since kept rates at 4.35% since May. Most banks, including Commonwealth Bank of Australia and Goldman Sachs Group, expect the committee to tighten policy on Tuesday. ANZ, UBS Group and HSBC HOLDINGS also expect the RBA to raise rates at two consecutive meetings. As a result, Paul Bloxham, chief economist for Australia at HSBC, expects a "hawkish hike" on Tuesday and said his forecast of two rate hikes will hit the economy. He said: "We expect this to stall economic growth from the end of this year into early next year, and we think recession risks are rising." The Middle East conflict and the Russia-Ukraine conflict are also strengthening inflationary pressure in the global environment. Neither conflict appears likely to end soon, and both are pushing fuel prices higher. The artificial intelligence investment boom is also driving prices up. Major central banks are responding - the Federal Reserve, the Bank of Japan and the European Central Bank all raised rates over the past month, while the Bank of England warned that policy may need to be tightened. As shown in the chart above, Australian fuel prices are accelerating - prices rose 16 cents in the past week alone, the largest increase since mid-June. The Organisation for Economic Co-operation and Development expects inflation in wealthy countries to persist through 2027 and warned central banks, including the RBA, to "remain highly vigilant" and intervene more forcefully than in the post-pandemic period. The International Monetary Fund also issued a similar warning directly to the RBA this month, urging it to be ready to raise rates. Even before the U.S. and Israeli strikes on Iran caused fuel costs to surge, Australia was already dealing with accelerating consumer price increases. The country's current inflation rate ranks among the highest in developed economies. However, other factors suggest the RBA may not need to push rates as high as some more hawkish forecasts envisage. Australia's housing market, which is closely tied to many parts of the economy, is in a downturn, and another rate hike could deepen it further. The unemployment rate is also rising, while Commonwealth Bank of Australia's household spending insights data show that household spending, after previously proving resilient, is slowing broadly. AMP economist My Bui said: "The current upward trend in the unemployment rate shows that rate hikes are working, although very slowly." But she added that this "will not stop the RBA from raising rates further."