Australia central bank saw upside risks to inflation lingering after September rate hike

[SYDNEY] Australia’s central bank still sees risks that inflation could prove more stubborn than assumed amid excess demand at home and higher energy costs globally, leaving the door open to a fifth rate hike this year if needed.

Minutes of the Reserve Bank of Australia’s Sep 28-29 board meeting released on Tuesday (Oct 13) showed the board only “briefly” considered holding interest rates steady, before unanimously voting to hike to 4.6 per cent as it saw an increased risk of persistently elevated inflation.

It cited a laundry list of arguments for tightening including that demand in the economy was greater than previously thought and that global cost pressures were building as oil prices surged amid the Middle East conflict.

The nine-member board saw a need to respond in a “timely manner” to anchor inflation expectations, given current financial conditions were judged to be restrictive but only modestly.

It also noted the possibility that financial conditions might loosen via a fall in the Australian dollar if monetary policy was left unchanged but other countries tightened.

“They considered it prudent to reinforce the anchoring of medium-term inflation expectations given the backdrop of a prolonged period of above target inflation, the indications from liaison of persistent cost pressures and an economy that, while slowing, continued to display a degree of resilience,” the minutes showed.

The board also discussed the challenges of judging how large the upside risks to inflation were or could become, noting the outlook would depend on the developments in the Middle East, the path of external demand, the extent of domestic capacity pressures and how that influenced the pass-through of cost shocks.

“Members noted that it was possible these factors could continue to place upward pressures on inflation,” said the minutes. “The board remain focused on its mandate to deliver price stability and full employment and will continue to do what it considered necessary to achieve that outcome, including increasing the cash rate target further if required.”

In contrast, there were just a couple of arguments for leaving rates unchanged, including falling housing prices and the potential for the Middle East conflict to hit demand.

SEE ALSO

Australia’s central bank lifts rates to 15-year high, signals risk of further hikes

Markets imply a 30 per cent chance that the RBA could raise rates to 4.85 per cent at its next meeting on Nov 3 and 4. That lifts to 50 per cent for December, while a move by May next year is fully priced in.

The board also endorsed the establishment of Term Repo Operations to offer liquidity through longer maturities to the market, complementing the existing standard liquidity facilities. They would be operational in 2027. REUTERS