At 3 p.m. AEDT, the horses in Race 7 will take to the track to determine this year's Melbourne Cup winner.
However, the big day traditionally includes another major event that attracts far more punters and far more money. This year is shaping up to be even bigger than usual.
- Half an hour earlier, Reserve Bank governor Phil Lowe is scheduled to deliver an interest rate decision, with billions of dollars at stake.
- Why the Melbourne Cup? Except for January, the RBA meets on the first Tuesday of each month, and until now, only four of those meetings have been preceded by an inflation result. November is one of them, and the Melbourne Cup is always held on the first Tuesday of that month.
- The September quarter inflation figures were released last Wednesday, and when they hit the trading screens, financial markets went into overdrive.
- points since May - there were hopes that the rate of price growth would slow. But that was not to be. No matter how you looked at it, the numbers were significantly higher than expected.
- Even the RBA preferred measure, which excludes many one-time movements and volatile items, set a blistering pace.
- As a result, the biggest bet in town right now is whether the RBA will resume its double rate hikes from last month or stick with the single 0.25 percentage point increase that it dialed down earlier this month.
- The issue with economists
- Economists have increasingly ruled the world over the last 50 years. They infect, er, affect, government and the decision-making process in almost every area, from health to air safety, and, most importantly, how to keep the economy on a steady course.
- If this is the case, why do they get it so incorrect so often? Consider the number of financial market crises and economic meltdowns that have occurred since the 1980s, including the 2008 global financial crisis, which originated in, of all places, the United States - the home of the economics profession.
- The commotion over tomorrow provides an illuminating glimpse into how things can go so wrong.
- Because it is a study of human behavior, economics is an imprecise science. Humans, as we all know, can be completely unpredictable. That is when they behave as individuals. When millions of them are combined, almost anything that can go wrong will.
- The profession of economics assumes that this is not the case and that everyone always acts rationally. So, when it comes to forecasting, we're already off to a bad start.
- Many people then reduce everything to mathematical models that incorporate data about how we're doing and what we should do next. And this is where things go wrong. The result is as reliable as a dartboard, depending on how the input data is compiled and the number of ways it can be interpreted.
- Acceleration of inflation
- Last week's inflation figures were much higher than expected. Financial markets immediately raised borrowing rates on speculation of an official double hike tomorrow. A slew of market economists joined the fray.
- They factored in last week's 7.3 percent annual headline inflation, as well as the monthly increase and what's known as core inflation, and determined that the RBA needed to move by 0.5 percentage points.
- However, it is not quite that simple. For starters, there is a significant lag between when interest rates rise and when they begin to affect economic activity. Then there's the thorny issue of our massive levels of household debt. When you consider that our mortgages are mostly variable or only fixed for short periods, Australia is far more vulnerable to interest rate movements than almost any other developed country.
- According to bond markets, anyone with a $750,000 loan will have to pay an extra $1,920 per month once the rate-hiking cycle peaks next year. That's about 57 percent more than they were paying before the RBA's rampage in April, which would be more than enough to sink the market.
- The Commonwealth Bank is at the other end of the spectrum. It now expects repayment increases to top out at $1,370, a 40 percent increase over April levels.
- The other three big banks are somewhere in the middle, with ANZ closer to the bond market forecast and NAB and Westpac closer to the CBA.
- Whatever happens, it won't be pretty, especially for the large number of new home buyers who entered the market last year.