Cooler RBA hike expectations take away one source of support for the Australian dollar, at a time when US yields are rising and the Fed is on a hiking path . That leaves the AUD exposed to further dollar strength. Sticky services inflation should limit how far Australian rate expectations can fall, though, which caps the downside for front-end bond yields. Lower oil prices help Australian headline inflation but do little for the domestic services pressures ANZ is focused on, so the RBA’s cautious stance looks likely to persist.
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Growth is cooling, but services inflation isn’t, and that keeps the RBA from relaxing even as the case for another hike fades.
Summary:
ANZ economist Siddhant Kalra says expectations of further RBA rate hikes have cooled as Australia’s economy slows
Q3 trimmed mean inflation rose 1.0% q/q and 3.7% y/y, above forecasts and above the RBA’s 2% to 3% target band
Market services inflation posted its strongest annual gain since 2024
ANZ links market services prices to domestic capacity pressures
It says the strong result will keep the RBA cautious in the coming months
Expectations of further interest rate increases by the Reserve Bank of Australia have cooled as signs mount that the economy is slowing. But persistent inflation means the central bank is unlikely to drop its guard, according to ANZ economist Siddhant Kalra.
The pressure shows up most clearly in the RBA’s preferred core measure. The trimmed mean, which strips out the most extreme price moves each quarter, rose 1.0% in the third quarter and 3.7% from a year earlier. That was above forecasts and above the top of the central bank’s 2% to 3% target band. Market services inflation, which covers prices that depend mainly on local demand and labor costs, posted its strongest annual increase since 2024.
Kalra highlighted the services detail as the key point. Market services prices are closely linked to domestic capacity pressures, so they reflect how stretched the Australian economy is, rather than global influences such as oil prices or the currency. A strong reading suggests demand is still running up against the economy’s limits, which is the kind of inflation central banks find hardest to bring down.
ANZ said the strength of the result is likely to keep the RBA cautious in the coming months. That leaves the bank in an awkward position. Slowing growth argues against more tightening, while sticky underlying inflation argues against signaling that rates have peaked, let alone opening the door to cuts.
The global backdrop adds to the tension. Lower oil prices are easing pressure on headline inflation, but central banks elsewhere are leaning hawkish. The US Federal Reserve is widely expected to raise rates in December after a hotter than expected October inflation report, and the Bank of Japan is also expected to hike.
For the RBA, the coming months are likely to be about patience rather than action. Unless services inflation eases, a meaningful shift toward lower rates looks some way off, even if the bar for another hike has risen.
This article was written by Eamonn Sheridan at investinglive.com.
