With a hike close to fully priced, the asymmetry is clear. A hold, as Deutsche Bank expects, would likely knock the Australian dollar lower and rally short-dated government bonds, while a hike would largely confirm what markets already expect. The Reserve Bank of New Zealand’s surprise hold last week shows that central banks can defy near-unanimous pricing, which may make traders less complacent going into the decision. The oil call matters too: Deutsche’s view that Brent falls to $90 by early next year contrasts sharply with Goldman Sachs’ new $105 December forecast, so the outlook for fuel-driven inflation, and therefore for the RBA, depends heavily on how the Middle East plays out after the US midterms.
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Earlier:
JPMorgan joins hike call for RBA’s November meeting, sees tightening bias persisting
RBA set for fifth 2026 hike to 4.85% as banks flag risk of another move in February
ING lifts AUD/USD target to 0.71 as it backs a 25bp RBA hike next week
RBA set for back-to-back hike after hot CPI, says Natixis’ Garcia Herrero
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On a day built around picking winners, Deutsche Bank has backed the outsider, betting the RBA ignores the crowd and holds rates while the oil outlook clears.
Summary:
Deutsche Bank’s Phil O’Donoghue is the only one of 32 economists in a Reuters poll forecasting the RBA will hold on Tuesday; the rest, including Australia’s big four banks, expect a quarter-point hike to 4.85%
Markets price around an 85% chance of a hike after September-quarter inflation came in at 3.7%
O’Donoghue argues inflation is tracking the RBA’s forecasts, unemployment has already risen to 4.7%, and rates are biting
He expects a clearer post-midterm outlook for oil by December, with Deutsche forecasting Brent at $90 by early next year
He urged the board to reach its own conclusion rather than follow the public “echo chamber”, pointing to the RBNZ’s surprise hold last week
Almost every economist and trader expects the Reserve Bank of Australia to raise interest rates on Melbourne Cup Day. Deutsche Bank is betting it won’t, the Australian Financial Review reported.
Of 32 economists surveyed by Reuters, 31 forecast a quarter-point increase on Tuesday that would lift the cash rate to 4.85%, its highest level in nearly two decades and the fifth hike this year. That group includes Australia’s big four banks. Markets price around an 85% chance of an increase, and many traders expect a hike before Christmas if it does not come this week. The decision is due at 2:30pm Sydney time (0330 GMT, 2230 US Eastern on Monday).
The lone dissenter among major forecasters is Phil O’Donoghue, Deutsche Bank’s chief economist for Australia, who expects the board to hold. His case is that markets are reacting to old news. Inflation picked up to an annual 3.7% in the September quarter, well above the RBA’s target, but O’Donoghue argues that the figure was in line with the central bank’s own forecasts. The RBA has warned since March that prices were running hot and has already raised rates by a full percentage point, taking them to their highest level in 15 years. Unemployment, meanwhile, has risen to 4.7%, earlier than expected.
With borrowing costs biting and the economy cooling, O’Donoghue believes the board can afford to wait for more data in December. By then, he said, there will be new information on fourth-quarter inflation and a clearer outlook for global oil prices after the US midterm elections. Deutsche Bank forecasts Brent crude falling to $90 a barrel by early next year. Fuel prices have risen about 60% since the war in the Middle East began eight months ago and have been a key driver of inflation.
O’Donoghue acknowledged that the RBA has a “free hit” to raise rates, simply because markets and the media have prepared everyone for one. But he said he hoped the board would reach its own conclusion rather than rely on the public “echo chamber”, noting that the Reserve Bank of New Zealand did exactly that last week when it held rates despite markets being fully priced for an increase.
He is not entirely alone in questioning the consensus. Another bank economist said markets had got ahead of themselves, putting the chance of a hike closer to 60% to 70%, and noted that the decision rests with a nine-member board after four hikes in eight months. Two fund managers have also tipped a pause, one citing the strength of the Australian dollar, near 70 US cents, and the other warning that inflation may have peaked and the economy risks a prolonged downturn.
The RBA has defied market expectations before. In July last year, it held rates when traders had priced a 95% chance of a cut. JPMorgan, among the many banks expecting a hike, has argued that senior officials have signalled inflation is not yet under control. Whether Tuesday brings a fifth increase or a surprise pause, the board’s guidance and its new forecasts will be closely watched for signs of how close the tightening cycle is to its peak.
This article was written by Eamonn Sheridan at investinglive.com.
