Monetary policy will be loosened next year

With inflation surprising to the upside in Q3, the Reserve Bank of Australia was forced to revise up its near-term forecasts for inflation in its latest Statement on Monetary Policy. What’s more, the Bank’s forecasts were based on the technical assumption that the cash rate will peak around 3.5% instead of the 3.0% assumed in August, yet the Bank still expects inflation to remain above the top-end of its 2-3% target range by end-2024. And with the Bank sounding increasingly worried about a wage-price spiral evolving, we are comfortable with our forecasts that the cash rate will peak at an above-consensus 3.85% by April. However, we expect that aggressive path of tightening to result in a more pronounced slowdown in economic activity than the Bank anticipates, which should eventually take the heat out of inflation. Accordingly, we still expect the RBA to cut rates by the end of next year.