In the first half of December we will have a litany of central bank meetings. The ball will start rolling with Reserve Bank of Australia and Bank of Canada next week, both of which are set to raise interest rates, albeit at a slower pace.
Economic development since the last RBA meeting has been favorable. The labor market remains extremely tight and the unemployment rate has fallen to its lowest level in half a century. Meanwhile, wage growth accelerated in the last quarter, which is usually a sign of strengthening inflationary forces.
Against expectations for an increase, both headline and core inflation rates for Australia's monthly inflation series fell in October. The headline inflation rate fell from 7.3% year-on-year in September to only 6.9% YoY in October.
How the RBA fight against inflation?
The RBA is working very hard to cool economic growth. It raised interest rates extremely quickly, from 0.1% to 2.85% in six months. They are expected to raise them more.
Interest rate hikes slow down the economy and fight inflation in a number of ways: households pay more for a mortgage, leaving less for discretionary spending; the australian dolar (AUD) appreciates, driving down imports and discouraging people from buying local produce; The return on savings is higher, which encourages people to save rather than spend, the cost of borrowing is high, which makes businesses less likely to borrow and spend.
Interest rate hikes are designed to divert money from spending to local businesses, making those businesses feel like they can't raise prices and wages. The RBA's job is to keep inflation an average of 2 to 3% a year and currently inflation is well above that target.
Expectations
The latest inflation figures might provide a reprieve for mortgage holders from ongoing escalating interest rate rises when the Reserve Bank meets on December 6 to decide on the official cash rate.
The Australian economy continues to run at full capacity, setting the stage for another interest rate hike. Investors say that the cycle of monetary policy tightening may be stopped as soon as this month. This is mainly because inflation fell unexpectedly in October, fueling hopes that the worst was over. With house prices also falling and external threats intensifying as the Chinese economy loses momentum, there are solid arguments for a slowdown in the RBA.
Markets currently rate a 75% probability of a quarter point rate hike and a 25% chance of no change at all.
Westpac chief economist Bill Evans still believes the RBA needs to raise interest rates by 0.25 percentage points both in December and at its next meeting in February to quell continued inflationary pressures.
The RBA said it would watch the data to see how many more rate hikes are needed to cool inflation without crushing the economy. The problem is that most of the data is from a few months ago, before rate hikes became popular. It takes some time for interest rates to take effect.
