The October monetary policy meeting saw the Reserve Bank of Australia (RBA) continue to hold the cash rate steady for the fourth consecutive month at 4.1 per cent, however, the minutes from the October meeting showed a more hawkish central bank in regards to inflation.
The RBA noted that it has “a low tolerance for a slower return of inflation to target than currently expected” and that future interest rate increases would depend on incoming data, particularly the third quarter Consumer Price Index (CPI) data set for release next week (25 October) and how this data would “alter the economic outlook and the evolving assessment of risks”.
The decision to hold the cash rate came as RBA board members concluded that there had not yet been ”sufficient new information over the preceding month from economic data or financial markets to necessitate an adjustment in the stance of monetary policy”.
This is in line with RBA governor Michele Bullock’s statement following the October decision, flagging that there are “significant uncertainties” around the economic outlook regarding services price inflation, lags in monetary policy, and household consumption.
In consideration of a rate hike in October, the board’s case centred around the outlook for inflation and the associated risks.
“Members noted that core services inflation remained persistent internationally. Domestically, the monthly CPI indicator suggested that progress in lowering services price inflation remained slow.
“It was noted that the rise in retail petrol prices would continue to underpin inflation over coming months and could influence households’ inflation expectations,” the board stated.
RBA members acknowledged the “significant concern” of upside risks due to how long inflation is likely to remain above the target range of 2–3 per cent.
Furthermore, several bank economists previously noted that the chance of a rate hike in November hinges on the 3Q CPI data.
Commonwealth Bank of Australia (CBA) head of Australian economics Gareth Aird said the monthly CPI indicator means there is upside risk to the major bank’s third quarter CPI forecast, and holds the view that the November board meeting is “live” and ascribed a 40 per cent chance for another rate rise.
“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,” Mr Aird said.
“But the board are not willing to let inflation sit above the target band for too long.”
Additionally, ANZ head of Australian economics Adam Boyton noted that the RBA board meeting “read more hawkishly” than the September set.
“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.
“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,” Mr Boyton said.
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