Traders trim rate rise bets after surprise inflation print

“It effectively rules out the risk of a pre-Christmas interest rate hike from the Reserve Bank,” said David Bassanese, chief economist at Betashares.

Yet, Deutsche Bank’s Phil O’Donaghoe, is among the few economists still calling a rate lift next week to 4.6 per cent, even though he admits he has less conviction than before.

“The RBA cash rate needs to be higher than it is now,” said Mr O’Donaghoe, chief economist at Deutsche Bank Australia. “Any delay beyond December only increases the chance that the RBA needs to hike more than once in the new year, and with that comes a delay to the timing of any cuts.”

Meanwhile, the Australian dollar shrugged off the inflation data and climbed as far as US66.76¢, a level last seen on August 1.

It was dragged higher after the NZ dollar jumped 0.8 per cent after the RBNZ’s policy statement revealed it discussed the “possibility of the need” for further tightening. The central bank held, as expected, its cash rate at 5.5 per cent at its meeting on Wednesday.

“On the day when either the Aussie or the Kiwi dollar moves significantly, the other currency follows,” added Ray Attril, head of FX strategist at National Australia Bank.

The Australian dollar had already been underpinned by a slump in the greenback in the last week on expectations that the US Federal Reserve will cut interest rates well ahead of the RBA.

On Tuesday, Fed governor Christopher Waller, known for his hawkish views, flagged the prospect of a reduction in rates next year.

US rate cuts

“If the decline in inflation continues for several more months ... three months, four months, five months ... we could start lowering the policy rate just because inflation is lower,” he said on Tuesday.

Fed futures are nearly fully priced for a rate cut in May, from an around 50 per cent chance before the comment, and imply four quarter-point reductions next year, taking the policy rate to 4.3 per cent in one year.

“The market risks moving too far too soon if the Fed remains on hold for longer than is currently expected,” warned Sean Callow, a senior FX strategist at Westpac.

The US dollar was on course for a 3.7 per cent decline in November, the worst monthly performance in a year. That diverging rate outlook between the Fed and the RBA sent the Australian dollar nearly 5 per cent higher this month, the biggest gain in 2023.

The gap between Australian and US two-year rates has also shrunk to just 5 basis points, from 31 basis points in June.

Westpac expects the Aussie to test the August 1 top of US67.23¢, but said that further gains will be limited due to the cool investor response to China’s stimulus measures to revive a troubled property sector.

The Australian dollar is sensitive to views about China because it’s Australia biggest export partner. Commonwealth Bank estimated that about 7 per cent of domestic activity was directed to the world’s second economy last year.