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Hawkish minutes from the Reserve Bank of Australia have put another interest rate hike back on the table.
The minutes of the RBA's September meeting show a central bank prepared to accept slower growth and weaker employment to bring inflation down, reviving the case for a November rate hike.
A further hike would widen the interest rate advantage the Australian dollar offers investors, and the minutes show the RBA wants to keep that advantage as other central banks tighten.
The Board warned that rate hikes abroad could loosen Australian financial conditions through a weaker exchange rate, which leaves the RBA inclined to keep pace and the Aussie supported.
"The RBA minutes read hawkish and an interesting comment on the currency where they seemingly don't want to encourage any relative underperformance," says J.P. Morgan's London FX trading desk.
The tone contrasts with Governor Michele Bullock's press conference after the September hike, which cast doubt on further tightening and sent the Australian dollar lower.
"The Minutes were decisively hawkish with a clear focus on upside risks to inflation and little attention given to downside risks to growth," says a daily note from Commonwealth Bank of Australia, the Australian lender.
The Board considered holding rates only briefly. It judged that the neutral interest rate, the level that neither stimulates nor restrains the economy, may have shifted higher, and it left the door open to "increasing the cash rate target further if required."
Markets priced just above a 20% chance of a November hike ahead of the release, with one further increase fully priced by May 2027.
"This reads as very hawkish and leaves the door very much open to further tightening," says Rabobank.
The Pound to Australian Dollar rate is at 1.8927, below the 1.9412 year-end level CBA forecast last week, a target built on the RBA staying on hold.
ANZ and Corpay Back a November Hike from the RBA
Turning to the hawks, "we continue to expect that a rate hike in November is more likely than not," says ANZ. "Although the incoming data and global events will play a large part in shaping the MPB's views between now and November."
Elsewhere, Corpay says in a recent update that markets "may be underpricing the chances of another hike by year-end."
September's NAB business survey backs the hawks: capacity utilisation, the measure of how hard firms are running their resources, remains well above its long-term average.
"Cap Util, the most important series for RBA, only a touch lower, well above long-term averages. This adds support to their latest opinion in the Minutes that domestic capacity pressures remain a key issue," says Stephen Spratt at Société Générale.
Jobs and Inflation Data Decide November
CBA still expects a hold, but now flags a clear risk of a 25 basis point hike in November, having argued before the minutes that "the hurdle for another hike is now higher."
Thursday's September labour force report is the first test, with consensus looking for 20,000 new jobs and CBA forecasting 10,000, alongside a steady 4.6% unemployment rate.
The minutes urge caution in reading the labour force figures after methodology changes to the survey, and CBA's economists see fewer implications for the RBA because of data quality concerns.
That puts the weight on third-quarter inflation data due 28 October, the week before the RBA meets on 3 November.
A hot inflation print would cement a November hike and keep the pound below 1.90 against the Australian dollar, while a soft one restores the case for CBA's 1.9412 year-end target.
