The prospect of another official interest rate increase will hinge on upcoming data on jobs and prices, with the Reserve Bank declaring it had “a low tolerance” should inflation not slow at the pace it has previously expected.
Minutes from the RBA’s 3 October meeting, released on Tuesday, show the board weighed up the option of lifting the official cash rate by 25 basis points to 4.35% before leaving the rate at 4.1% for a fourth straight month.
“There had not been sufficient new information over the preceding month from economic data or financial markets to necessitate” an increase, the minutes said.
However, by the next meeting, set for 7 November’s Melbourne Cup day, it would have fresh labour market and inflation figures and its own revised quarterly forecasts.
“Some further tightening of policy may be required should inflation prove more persistent than expected,” the RBA said.
Recent inflation numbers, including an uptick in the headline consumer price index in August to 5.2%, indicated that price increases may not decline as expected. Fuel prices, including a 30% increase in oil prices since the end of June, were also of concern.
The board noted “the rise in retail petrol prices would continue to underpin inflation over coming months and could influence households’ inflation expectations”.
A separate ANZ’s survey of consumer sentiment, also released on Tuesday, showed inflation expectations increased 0.2 percentage points to 5.3% in the past week. Its four-week moving average increased to 5.3% from 5.2%.
Petrol prices have eased from September highs although the decline may reverse in coming weeks as higher oil prices in the wake of Hamas’s attack on Israel take effect.
Borrowers, particularly households, are hoping the RBA’s 400 basis points of rate rises since May 2022 is the peak. Investors are so far predicting the next RBA move – under new governor Michele Bullock – will be a cut although their outlook could shift depending on how September figures for jobs, due Thursday, and inflation figures, due the following Wednesday, play out.
Initial market reaction on Tuesday was moderate with the Australian dollar nudging above 63.5 US cents and shares paring their gains for the day.
Nab, which remains alone among Australia’s big four banks to predict a November rate rise, said the RBA’s comment of its “low tolerance” should inflation fail to slow as it predicted was a “hawkish” insertion compared with recent communications.
Next month’s meeting was “clearly live”, with the quarterly inflation numbers likely to exceed the RBA’s earlier expectations, Nab said.
Economists such as Warren Hogan at Judo Bank have also forecast at least one more rate rise to come – possibly at next month’s meeting.
The recovery of home values in major cities has been one surprise compared with forecasts at the start of the year.
Back then, prices had dropped on average by about 7% from their peaks with another 5% to 8% possible, Hogan said. Instead, there were up 4% to 5%, “a pretty big swing” compared with predictions.
“The rise in housing prices could also be a signal that the current policy stance was not as restrictive as has been assumed,” the RBA minutes stated, adding “although there was other evidence that monetary conditions were tight”.
That evidence includes weak consumer spending as households coped with about 10% of their disposable income going to repay debt – a record high.
The pace of monthly increases in rents had been “broadly stable” but conditions remained “very tight”. That suggested rents would be “an ongoing source of inflationary pressure over the year ahead”, the RBA said.
The board minutes noted the labour market had “reached a turning point” with the supply of new job seekers picking up and demand for workers moderating. Job vacancies had fallen from their peak last year “but remained high”.
“Members noted there were few signs of the risk of a price-wages spiral materialising” and household disposable income once inflation was taken into account was 3% lower than a year ago, the RBA said.
The threat of “a material slowdown in the Chinese economy remained a key risk to the global outlook”, the bank said. Still, indicators had been more positive than in prior months, supporting prices for iron ore and coking cool – two of Australia’s biggest exports.
