Synopsis:

Credit Agricole is directing attention to the upcoming Q3 CPI data from Australia, acknowledging its potential impact on the Reserve Bank of Australia's (RBA) monetary policy decisions. The communication from RBA officials, including Governor Michele Bullock, underscores the bank's readiness to adjust interest rates if inflation dynamics deviate from their expectations, which hinges on forthcoming inflation figures.

Key Takeaways:

• Bullock's Forward Guidance: In a forthcoming speech, RBA Governor Michele Bullock is expected to reiterate the RBA's stance on potential rate hikes. The central bank's proactive approach aims to stabilize inflation expectations, preventing drastic future measures that could negatively impact employment. This stance emphasizes the RBA's commitment to its inflation target and readiness to act if the inflation trajectory risks delaying target achievement.

• Inflation Forecasts and Sensitivities: The RBA's current projections show headline inflation returning within the desired 2-3% range by late 2025, with core inflation (trimmed mean) expected to follow by mid-2025. Any indication of these targets being pushed further could prompt swift policy responses. The impending Q3 CPI data, therefore, holds significant weight, particularly following recent softer inflation trends in neighboring New Zealand.

• Expectations for Q3 CPI: Market participants anticipate Australia's Q3 CPI to influence RBA's November policy decisions. The RBA expects a considerable drop in both headline and trimmed mean inflation by the end of the year. For the RBA to maintain a comfortable stance during its November meeting, Q3 CPI readings need to hover around 5% YoY, aligning with the bank's current forecasts.

• Market Positioning and Potential Reactions: The Australian rates market slightly anticipates a November rate hike, with current pricing reflecting over a 20% probability of a 25bp increase. Given this positioning, the AUD and rates market are poised to be more reactive to higher-than-expected inflation figures. Any significant deviation, particularly on the upside, could trigger market adjustments, considering the RBA's sensitivities to inflation trends.

Conclusion: Credit Agricole highlights the market's heightened focus on Australia's Q3 CPI data, recognizing its capacity to sway RBA monetary policy, particularly concerning interest rate adjustments. The central bank's vigilant stance on inflation targets and the anticipated speech from Governor Bullock accentuate the importance of aligning inflation trends with RBA forecasts. Market reactions, especially in AUD and rate movements, are expected to skew towards stronger responses to upward surprises, underscoring the critical nature of the upcoming inflation data.