Will the Reserve Bank of Australia raise rates on Sep 29?

The Reserve Bank of Australia has spent this year raising rates, pausing and watching the data. The latest evidence suggests the pause may be coming to an end. Kalshi's contract on the decision prices a quarter-point rise at 95% probability.

The bank's main tool is the cash rate, the base interest rate that Australian mortgages and loans are built on. When prices rise too fast, the bank raises it to make borrowing more expensive, which slows spending and inflation. This year it has already done that three times, taking the rate from 3.60% to 4.35% by May 5.

Then it paused to see whether that was enough. When it held again on August 11, it promised to bring inflation back to target, “including increasing the cash rate target further if upside risks materialize.” In plain English, if inflation does not come down, rates go up again.

Well, inflation did not come down. The number the bank watches most closely is the trimmed mean, which leaves out the month's biggest price jumps and drops to show the underlying trend. It was 3.6% in the year to June and 3.6% again in the year to July, stuck above the bank's 2% to 3% target.

The bank's leaders are now saying so themselves too. Governor Michele Bullock told a parliamentary committee on September 18 that the question is “whether the tightening in monetary policy to date will be sufficient.” Commonwealth Bank, Australia's largest lender, quoted her as saying “some of these upside risks to inflation appear to be materializing,” which is the exact condition from August, and it now forecasts a quarter-point rise to 4.60%.

A rate hike is not guaranteed, but the arguments against one are becoming harder and harder to sustain. With underlying inflation still above target and policymakers warning about renewed upside risks, the bank is very likely to raise the cash rate at the September 29 meeting.