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Aussie Econonmy Research: RBA and Melbourne Cup

* The RBA was the first G-20 central bank to start removing policy accommodation

* We expect a second 25bp rate hike this week, and another in December

* The inflation outlook has worsened and current policy settings are “possibly imprudent”

Tuesday sees the running of the Melbourne Cup, the horse race that “stops a nation. ”Unfortunately, the Reserve Bank Board gathers on the first Tuesday of every month, and officials will announce the policy decision just minutes before the horses leave the gates. Last year, unsuccessful punters at least could rejoice at the 75bp rate cut announced just before the big race. This year will be different: our forecast is for the RBA to announce a 25bp rate hike, following the quarter-point hike in October.

Last week’s elevated 3Q inflation print and the increased urgency in the tone of recent RBA commentary hint that there is an outside chance of a 50bp move Tuesday. The inflation print, however, failed to deliver a big enough surprise to trigger a larger move. Our base case, therefore, is that there is little to be gained from spooking the horses on Cup day.

Indeed, we believe the RBA’s rate hikes will come regularly—at every meeting until February—but in small steps. Only a material upside surprise in the data, or evidence that the deterioration in the inflation outlook has accelerated, could prompt a larger rate move.


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