Reserve Bank says more rate rises could be needed should inflation be ‘more persistent’

The RBA warns further rate rises may be needed if soaring petrol prices see inflation prove more persistent than expected, after board minutes show that it weighed another hike this month.

The Reserve Bank is not ruling out further increases to the cash rate as it warns that soaring petrol prices threaten to derail the recent slowdown in inflation.

The minutes from the last meeting in which Philip Lowe served as governor cautions over the risk of a stronger than expected slowdown in the nation’s economic outlook and that the downside risk to the Chinese economy had increased.

The minutes show that “further tightening in policy may be required should inflation prove more persistent than expected”.

The RBA’s wording was stronger than at the bank’s August meeting, which said it “was possible that some further tightening of monetary policy might be required to ensure that inflation returns to target in a reasonable time frame”.

Most economists believe that the central bank was keeping its options open for another rate hike if circumstances such as an upshift in inflation occur.

The threat of further interest rates rises saw the benchmark S&P/ASX 200 extend its intraday fall following the release of the RBA board minutes to be down by 0.4 per cent to 7200 at the close.

The minutes concluded the final meeting chaired by the now former governor of the RBA, Philip Lowe. Picture: AFP

The RBA board said that a decision to lift the cash rate at any upcoming meetings will be guided by the incoming data and how these alter the economic outlook and the assessment of risks.

“In making its decisions, the board will continue to pay close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labour market,” the RBA said.

“Members reaffirmed their determination to return inflation to target within a reasonable time frame and their willingness to do what is necessary to achieve that outcome.”

Westpac chief economist Bill Evans said the board is maintaining its options to hike again if inflation surprises to the upside.

“That approach leaves the Board with options in the event of some unexpected and sustained lift in inflation, certainly putting the Q3 CPI report right to the fore. The Monthly CPI Indicators will also play a role in the decision but are unlikely to trigger a rate hike without confirmation from the quarterly report,” he said.

“Based on our own forecasts, and the clear tone of the minutes, we expect that the ‘hurdle’ for an inflation induced rate hike at the November meeting is quite high.”

While the bank opted to keep rates on hold at 4.1 per cent for a third straight month, it also weighed a 25 basis point rise on the expectation that inflation will remain above the bank’s target for a prolonged period and the risk that this period might be extended.

“This could occur if productivity growth does not pick up as anticipated or if high services price inflation is more persistent than expected,” the minutes said.

However, rates were left on hold because the board felt that interest rates had already “increased significantly” in a short period, and that the effects of tighter monetary policy were yet to be realised.

“Members recognised the value of allowing more time to see the full effects of the tightening of monetary policy since May 2022, given the lags in the transmission of policy through the economy,” it said.

ANZ economist Blair Chapman and Adam Boyton said that the minutes did not change the bank’s outlook for the cash rate, tipping an extended pause at 4.1 per cent unless inflation and labour data “notably surprise to the upside”.

With annual inflation down to 5.4 per cent in July versus its recent peak of 8 per cent in December 2022, the RBA warned that the process of returning inflation to its target band of 2-3 per cent could be “uneven” given the recent surge in petrol prices.

Global oil prices have soared by more than 20 per cent in recent months to be trading near $US100 per barrel amid supply constraints driven by a cut in production from OPEC nations.

“The recent rise in petrol prices – an important input for households’ inflation expectations – highlighted that the process of returning inflation to target could be uneven,” the RBA said.

Commonwealth Bank economist Stephen Wu said that a surge in oil prices could fuel the case for a rate rise with the central bank having only forecasted oil to be $US80 per barrel in its inflation outlook in August versus the current $US95 per barrel it is trading at.

“We have noted previously an upside surprise to the RBA’s inflation profile is needed for the RBA to judge another rate hike is warranted,” he said. “The recent increase in oil prices is an upside risk to the inflation outlook.”

Members observed that the economy was expected to grow well below its trend pace over 2023 as cost-of-living pressures and higher rates weigh on demand, with year-ended GDP growth forecasted to be 1 per cent before picking up to 2.25 per cent by the end of 2025.

There was a risk that the economy could slow more sharply than forecasted, according to the RBA, which was concerned that consumption could be weaker than expected, and the downside risks to the Chinese economy had increased.

“Members concluded that recent developments had not materially altered the outlook or their assessment that the economy still appears to be on the narrow path by which inflation comes back to target and employment continues to grow,” the minutes read.

The RBA board said that while the labour market remains tight with unemployment at 3.7 per cent in July, it was now at a “turning point”.

“The easing in labour market conditions had reflected both an easing in growth in labour demand (following slower growth in economic activity) and strong growth in labour supply,” the RBA board said.

“Firms in the Bank’s liaison program had reported an improvement in labour availability, but that finding suitable workers continued to be more difficult than prior to the pandemic.”

The next RBA board meeting on October 3 will be the first to be chaired by its new governor, Michele Bullock.