Minutes from the Reserve Bank of Australia’s (RBA) latest monetary policy board meeting was released on Tuesday (17 October), revealing the central bank considered the case for another increase to the official cash rate, which currently sits at 4.1 per cent.
According to RBA members, sticky services inflation and resurgent energy costs supported the case for further tightening.
“Members noted that core services inflation remained persistent internationally. Domestically, the monthly CPI indicator suggested that progress in lowering services price inflation remained slow,” the RBA minutes read.
“It was noted that the rise in retail petrol prices would continue to underpin inflation over coming months and could influence households’ inflation expectations.
“Members acknowledged that upside risks were a significant concern given how long inflation is likely to remain above target.”
The RBA also flagged the risks associated with rising residential property prices, warning the negative wealth effect could spur an increase in household consumption, particularly if housing turnover “were to pick up more quickly than expected”.
Moreover, rising housing prices could suggest the tightening cycle “was not as restrictive as had been assumed”.
But ultimately, the RBA board opted to keep rates on hold for the fourth consecutive month, noting interest rates had been “increased significantly in a short period”.
The impact of 400 bps in cumulative tightening, the RBA added, would “not be fully evident in the data on economic activity and inflation for some months”.
Despite the lagged impact, the RBA acknowledged inflation had fallen well below its peak since the hikes commenced in May 2022.
The central bank also pointed to the deterioration in labour market conditions, weaker household consumption, and the decline in real disposable income.
“In weighing up these two options, members agreed that the case to leave the cash rate target unchanged at this meeting was the stronger one,” the RBA stated.
“They concluded that there had not been sufficient new information over the preceding month from economic data or financial markets to necessitate an adjustment in the stance of monetary policy.”
Outlook remains hawkish
While opting to leave the cash rate unchanged in October, the RBA’s monetary policy board continues to leave the door open for further hikes.
The central bank stressed it has “low tolerance” for slower progress to the 2–3 per cent inflation target than currently expected.
According to Adam Boyton, head of Australian Economics at ANZ Research, this hawkish tone suggests the November monetary policy board meeting would be “live”.
Mr Boyton said the RBA’s next move would hinge on the results of the next inflation and labour market prints, but warned risks for further tightening are elevated.
“Our view is that a rate rise in November would require an uncomfortably high CPI print, possibly combined with some sign of strength in the labour market,” he said.
“Pending the upcoming labour market and inflation data, we continue to expect the cash rate to remain at 4.1 per cent.
“Risks of RBA action appear to be rising, however.”
Gareth Aird, head of Australian economics at the Commonwealth Bank’s global economics and markets research division, agreed, acknowledging the latest minutes’ “slightly more hawkish tone”.
He said the RBA is using the minutes to “keep markets on notice”, as evidenced by its new reference to “low tolerance” for slower progress to the inflation target.
“The RBA is willing to take a little longer than other central banks to return inflation to the target band to preserve as many of the gains in the labour market as is possible,” he said.
“But the board are not willing to let inflation sit above the target band for too long.”
Ahead of the next monetary policy board meeting, markets are awaiting the release of the latest labour force data this Thursday (19 October) and the next consumer price index (CPI) next Wednesday (25 October).
Next month’s RBA board meeting is scheduled for Melbourne Cup Day (Tuesday, 7 November).
