RBA rate hike likely be limited to 25bp

A widely anticipated interest rate rise on Melbourne Cup day looks like being
limited to 25 basis points as new data shows business facing very few overall cost
pressures.

The producer price index (PPI) for the September quarter released on Monday showed
annual cost pressures at the final stage of production at their lowest level in at
least 11 years.
This was largely the result of a strong Australian dollar, which has dramatically
cut the cost of imports, economists say.
"The RBA will likely take heart from significant falls in imported producer prices,
hoping the recent strength of the Aussie dollar will assist in keeping the downward
momentum in consumer prices going as well," ANZ economist Alex Joiner said.
The consumer price index (CPI) for the September quarter, and corresponding
underlying measures of inflation, are due out on Wednesday.
Comments in the central bank's October board minutes released last week indicated
some concern that the more policy-sensitive underlying measure of inflation was
unlikely to fall as fast as first thought.
This raised talk of a possible 50 basis point interest rate increase at the November
3 board meeting to back up this month's 25 basis point rise, the first hike in 19
months.
The difference between a 25 and 50 basis point rate rise for homeowners with an
average $300,000 mortgage would be around $45 and $90 on their monthly repayments.
However, ANZ Bank customers can draw some comfort that their home loan repayments
won't go up any more than the official rate move.
In an interview with the Herald Sun newspaper, ANZ chief executive Mike Smith has
promised not to slug its 800,000 home borrowers with variable interest rate rises
above RBA rate moves.
"I would be reluctant, frankly, to do anything until we really have to," Mr Smith
told the newspaper.
"I'm concerned we're in a quite fragile stage of recovery (and) I'm reluctant to
move above the Reserve Bank right now because I can't see how it would be in the
best economic interests of Australia."
None of the other major banks - Commonwealth Bank of Australia, National Australia
Bank and Westpac - have made such a pledge.
The PPI at the final stage of production rose just 0.1 per cent in the September
quarter, ending two consecutive quarters of price falls.
Prices were only 0.2 per cent higher than a year earlier, the slowest pace since the
Australian Bureau of Statistics began the series in September 1998, and down from an
annual rate of 2.1 per cent in the year to June.
Economists had expected the September quarter PPI to rise 0.3 per cent for an annual
rise of 0.5 per cent.
Final production import prices fell 5.1 per cent in the quarter, although domestic
prices rose 1.0 per cent, led by a 12.1 per cent increase in electricity, gas and
water prices.
Fuel costs also rose 6.0 per cent.
"In terms of implications for CPI there would appear to be some downside risk at the
margin," CBA economist James McIntyre said.
"However, key categories such as food, electricity and energy showed rises, which
are likely to be replicated in the CPI."
Economists' forecasts centre on a 0.9 per cent increase in the CPI for the September
quarter for an annual rate of 1.2 per cent, remaining below the RBA's two to three
per cent inflation target.