Australia's inflation report has thrown a rate hike back into play. Consumer prices rose 1.3% in the third quarter, pushing annual inflation to 3.9%, according to the Australian Bureau of Statistics. More importantly for the Reserve Bank of Australia (RBA), a core measure that strips out volatile items stayed well above the central bank's target band, prompting traders to bet heavily on another rate increase as soon as next Tuesday.
Markets now imply an 88% chance the RBA lifts its cash rate by a quarter percentage point at its next meeting, up from 69% before the data was released. The cash rate currently sits at 4.6%, its highest level in about 15 years, after four hikes this year. Some economists have also moved up their forecasts, with Oxford Economics Australia saying a move "next week" now looks more likely.
Why core inflation matters
The RBA's main concern is the "trimmed-mean" inflation rate, a core gauge that excludes the biggest price swings to reveal the underlying trend. That measure ran at 3.7% year-on-year, still above the RBA's 2%-3% target band. The persistence of above-target core inflation is what has made policymakers and markets nervous.
When inflation stays high for a long time, households and businesses may start to expect it to continue, and adjust their behavior accordingly—asking for bigger pay rises, raising prices more aggressively, and making spending decisions based on the assumption that prices will keep climbing. Deloitte Access Economics, an economic research firm, flagged this risk, and it helps explain why the RBA might be willing to tighten policy again even after a series of hikes.
What a hike would mean for borrowers
If the RBA does raise rates, the impact would likely be felt quickly by borrowers. A higher cash rate usually raises banks' own funding costs and the benchmark rates used to price loans. Lenders often respond by repricing variable-rate mortgages and small-business loans soon after a move.
For households on variable-rate mortgages, that could mean higher repayments arriving within weeks, leaving less room in budgets for discretionary spending. It also signals that the RBA remains focused on stopping above-target inflation from becoming the new normal, even if that means more short-term pain for borrowers.
The RBA hike odds jump to 88% as inflation stays sticky, and investors are now watching closely to see whether the central bank follows through. The decision is due next Tuesday, and the data has clearly shifted the balance of expectations.
Broader market context
The inflation surprise also ripples through other markets. Australian stocks had been climbing as copper lifted miners ahead of the CPI release, but the hot reading could weigh on sentiment if it raises the prospect of tighter monetary policy. Similarly, shares were set to rise as oil eased with CPI taking centre stage, but the inflation outcome may now dominate trading.
The RBA's situation is not unique. Central banks around the world are grappling with sticky inflation and the need to balance price stability against economic growth. In Chile, for example, policymakers recently held rates at 4.5% as inflation lingered and growth slowed, showing the delicate trade-off many are facing.
What to watch next
The key date is next Tuesday's RBA meeting. If the bank does hike, it would be the fifth increase this year, and the focus would shift to how much further it might go. If it holds, it would need to explain why it is willing to tolerate inflation above target for longer.
For everyday investors, the main takeaway is that interest rates are not done moving yet. Higher rates tend to pressure stocks, particularly in rate-sensitive sectors like property and consumer discretionary, while also making cash and fixed-income investments more attractive. But the biggest impact is likely to be on household budgets, as mortgage repayments could rise again.
As always, the RBA will be watching the data, but the market has already made its call: a hike is now the base case.
