RBA Interest Rate Decision

The Reserve Bank of Australia (RBA) is widely expected to maintain interest rates at 4.35% in its upcoming meeting on Tuesday, focusing on future rate cuts.

After increasing the rate steadily over the past two years to address high inflation, the RBA's recent data indicates that consumer price index (CPI) inflation fell within its annual target range of 2% to 3% during the third quarter. Underlying inflation, excluding volatile food and fuel prices, remains high but aligns with the RBA’s expectations.

With stubborn inflation and a strong labor market, the RBA is likely to keep rates steady in the near term, offering limited guidance on potential rate cuts.

RBA Governor Michele Bullock has mentioned that inflation needs to rise sustainably before considering rate cuts, anticipating this within the next two years.

According to Luci Ellis, Chief Economist at Westpac Group, the chances of further rate hikes are low, but recent data do not suggest an immediate need for rate cuts. Ellis projects that rate reductions may begin in February 2025, which ANZ analysts also support, forecasting a drop in the cash rate to 3.6% by the end of 2025.

ANZ anticipates a move towards a neutral stance in the November meeting but sees few reasons for immediate rate cuts. They do not expect the RBA to consider increasing or reducing the cash rate at this meeting.

This approach contrasts with other major central banks, such as the Federal Reserve, which is expected to cut rates by 25 basis points this week following earlier cuts.

Reaction of ASX 200

The ASX 200 index reached record highs in October due to a strong risk appetite linked to global rate cuts. While it has since retreated, local rate cut speculation could boost Australian stocks, whereas hawkish signals from the RBA may negatively impact the index.

AUDUSD Reaction

The Australian dollar has weakened recently due to expectations of a less hawkish RBA, reaching a near three-month low in October. If the RBA maintains rates, the AUD may gain some strength but could weaken again with growing speculation about future rate cuts.