Macro Intelligence: unpacking the interest rate outlook amidst surging living costs

Article written by Juliette Saly

In this week’s IG Macro Intelligence, we unravel the intricate web of factors shaping the future of interest rates against the backdrop of escalating living costs. From the battle against inflation to the Reserve Bank of Australia's high-stakes decisions, and global economic alerts, we dissect the financial landscape in this exclusive report.

RBA's tightrope walk amidst soaring consumer prices

Inflation stands as a pivotal metric for investors and central banks in the present moment. The quarterly Consumer Price Index (CPI) release in October holds immense significance for the Reserve Bank of Australia (RBA) as it evaluates whether the current cash rate of 4.1% is sufficient to combat inflationary pressures.

The RBA maintains a flexible, medium-term inflation target, aiming to keep consumer price inflation within the range of 2% to 3% on average. The June quarterly report indicated that inflation in Australia has reached 6%, which is double the RBA's comfort zone.

The surge in costs is fueling inflation, encompassing higher petrol prices, elevated food costs, and increasing rents.

Inflation target range chart

Global oil prices

Global oil prices on the rise are contributing to higher prices at the fuel pump. The spread between US crude and Brent prices is currently at its narrowest since April. Furthermore, as a sign of future supply, US. energy firms have reduced oil rigs to their lowest level since February 2022, according to the energy services firm Baker Hughes.

Brent crude weekly chart

Fuel prices have been steadily climbing due to these oil supply reductions and the weakening Australian dollar.

Average petrol price increase chart

Average petrol price costs around the nation (per litre)

Global inflation outlook

The Organisation for Economic Co-Operation and Development (OECD) recently released its interim economic outlook, cautioning about persistently high consumer prices worldwide, including in Australia. The OECD estimates that core inflation in Australia will average 5.9% this year, up 0.4 points from its June estimate, and 3.3% in 2024.

The OECD attributes core inflation to cost pressures and high margins, measuring changes in goods and services while excluding volatile items such as petrol prices and food.

The organisation, now led by former Australian Finance Minister Mathias Cormann, recommends that "monetary policy needs to remain restrictive until there are clear signs that underlying inflation pressures have durably abated."

Historical cash rate target chart

Are rates going up?

Economists at the Big Four banks remain divided on whether the RBA has completed its rate-hiking cycle. The RBA has maintained its tightening bias but has gradually softened its language over time.

Money markets are pricing in a three basis point increase in the RBA cash rate, currently at 4.1%, in October, with a 100% likelihood of a hike by March 2024.

The RBA left rates on hold this month but the NAB is not predicting that this will be an extended pause; with one more rate rise forecast from the lender for November 2023, taking the cash rate to a peak of 4.35%.

CBA, Westpac and the ANZ see 4.1% as the peak, with cuts priced in as early as December next year.

RBA predications September 2023