RBA might(not) stay on hold

The recent low inflation result matters more to the RBA than the variable mortgage rate hikes by local banks. The latter are less important because corporate and personal lending and deposit rates were unaffected, such that the change did not have the economy-wide effect of an actual increase in the cash rate, with little apparent change in sentiment.

Mechanically, the unexpectedly low starting point for Q3 underlying inflation should lead the RBA to lower its near-term inflation forecasts from an average of 2.5% to 2-2.25%. However, it will revise its forecast profile for growth, given the strong recovery in surveyed business conditions. 

"The board will narrowly stay on hold, given that past rate cuts were often triggered by a downgrade to the growth outlook, the RBA held fire this time last year when confronted with a similar near-record low Q3 result", says Barclays.

Market pricing of the probability of a 25bp rate cut now stands near 45%. If the RBA cuts rates, the market will price in a higher probability of a follow-up cut in February, even though the bigger is positive, more important risk looming over Australia is the more uncertain outlook for China.