Next week the Reserve Bank of Australia (RBA) will be gathering to decide on the cash rate once again.
Unfortunately for borrowers, yet another rate hike is expected at the meeting in an attempt to combat rising inflation.
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How big will the RBA's rate hike be in October?
Last month, the RBA made another 0.5% increase to the cash rate, bringing it up to 2.35%.
Well, it looks like the market will have to brace itself for another sizeable hike at Tuesday's meeting. According to the latest cash rate futures, the market is pricing in a 79% probability of a hike to 2.85% next week.
This is a view shared with the economics team of banking giant Westpac Banking Corp (ASX: WBC).
According to its latest weekly economic report, Westpac's chief economist, Bill Evans, is expecting another 0.5% increase to the cash rate on Tuesday. This is higher than what the bank was expecting a month ago, when Evans was predicting smaller 0.25% increments from this month onwards. He commented:
While we have argued strongly that the RBA Board should slow the pace of increases once it has reached a neutral setting there was always some uncertainty as to whether the current starting point for the meeting, 2.35%, was sufficiently close to neutral to justify the scale back.
The Governor and Deputy Governor have opined on several occasions that real neutral is at least zero and using long run measures of inflationary expectations as a guide to the nominal component (2.5%) then neutral is at least 2.5%. Given this view and in light of the rise in global rates, it seems sensible to push the cash rate to 2.85% in October, taking it comfortably above the neutral benchmark before scaling back the pace of rate increases.
