Company Interview / Shane's View: another hike ahead

The RBA left rates on hold as widely expected but it signalled a clear tightening bias. Softer than expected readings for underlying inflation, jobs and house prices enabled it to remain in wait and assess mode. But it still doesn’t see inflation back to target until late next year, sees the risks as being on the upside to this with Governor Bullock noting that it will raise rates further “if required”, that its thinking very hard about when to raise rates and that it only considered a hold or a hike in rates at the August meeting.

Of course, this could just be jawboning but it's clear the RBA’s tolerance for more upside disappointment on inflation is low. And rightly so as the credibility of the inflation target and the RBA is now at risk.

Against this background we expect another RBA hike by year end, possibly in September but probably in November, taking the cash rate to 4.6% as underlying inflation is likely to take too long to fall back to target and the RBA will need to do more to reinforce its credibility.

The money market is now seeing a 64% chance of another hike by year end, albeit this is bouncing around with the oil prices.

Shane Oliver is Chief Economist at AMP. To hear more, tune in to Shane’s Simplifying Investing podcast here: Simplifying Investing | Podcast on Spotify.