Investors brace for Cup day rate rise
THE sharemarket is set for a volatile trading session as investors await an increasingly likely 50 basis point rate rise from the Reserve Bank on Melbourne Cup day as it tries to pull the reins on inflation.
The RBA will meet to discuss monetary policy settings on Tuesday, and while many economists predict a 25bp rise, a growing number of experts now expect a 50bp rise.
Wall Street provided a positive lead heading into the new trading week at the weekend,
with the Dow Jones Industrial Average rallying 2.6 per cent to a two-month high.
But Australian investors will be nervous ahead of the rates decision.
Brendan Rynne, KPMG chief economist, said the pace of inflation was still likely to be even stronger in the December quarter following last week’s CPI data that showed headline inflation at 1.8 per cent for the September quarter.
“I don’t think inflation is getting away from the RBA but certainly the (CPI) results last week were a bit stronger than we had anticipated,” Mr Rynne said.
“The real issue for the Reserve Bank is that in its last meeting it signalled that by going 25bp, and also through its statement that it was looking to have a bit more of a cautious approach to dealing with interest rate rises, now, what’s happened in the meantime is
we’ve had inflation surprises on the upside and the question now is whether or not they’ll stick to their guns.”
While Mr Rynne still expected a 25bp rise on Tuesday, Westpac chief economist Bill Evans is backing a 50bp rise and revised his predictions of where official interest rates would be by early next year.
“We now expect the Reserve Bank board to raise the cash rate by 50bp in November for a terminal rate of 3.85 per cent by March, revised up from 3.6 per cent,” Mr Evans said.
“During this period of rising inflation we have been most concerned about a strong inflationary psychology becoming entrenched in the Australian psyche …
“The best way for the central bank to break this nexus is … strong rhetoric and strong action.”