RBA has ‘significant concerns’ about inflation outlook

Hawkish minutes from the last Reserve Bank board meeting will raise fears that the board may be required to hit mortgage holders with a devastating 13th rate hike.

RBA governor Michele Bullock chaired her first board meeting earlier this month. Picture: John Feder

The Reserve Bank has “significant concerns” that inflation will stay high for too long, as soaring petrol prices and a resurgent property market raise the spectre of further interest rate hikes and Deloitte warned the economy was on “a knife’s edge”.

The RBA board at this month’s meeting again considered the case for hiking or holding the cash rate, before ultimately deciding the arguments were “stronger” for a fourth pause at 4.1 per cent.

The minutes said high petrol prices had “temporarily delayed” progress on reducing inflation, but also hinted that the board under new governor Michele Bullock may have a lower bar to further interest rate hikes.

“The board has a low tolerance for a slower return of inflation to target than currently expected,” the minutes read.

“Whether or not a further increase in interest rates is required would, therefore, depend on the incoming data and how these alter the economic outlook and the evolving assessment of risks.”

Jim Chalmers in response to the board minutes said “we understand that households are under the pump from higher interest rates and high but moderating inflation”.

“While inflation is moderating, it is more persistent overseas and it is expected to also be a bit more persistent here,” the Treasurer said.

“We’ve seen in other countries that the moderation in ­inflation is not necessarily a straight line and it can bump around from quarter to quarter.

“The primary focus of the ­Albanese government is rolling out billions of dollars in cost-of-living assistance that’s been especially designed not to add to inflation,” he said.

Economists are broadly split on the need for further monetary policy tightening, and the minutes will raise fears that the board may be required to hit mortgage holders with a 13th rate hike – despite recent RBA analysis showing as many as one in eight indebted homeowners is unable to pay the bills.

Capital Economics head of Asia-Pacific Marcel Thieliant said the underlying message from the minutes “suggests that the bank will lift the cash rate again if the (September quarter) inflation (numbers) due next week are stronger than the RBA had anticipated”.

“We think they will be,” Mr Thieliant added.

The looming threat of more mortgage pain came as Deloitte in its latest business outlook report warned the economy remained on “a knife edge”, and urged the central bank to hold fire on further interest rate rises.

Deloitte Access Economics partner David Rumbens said a recession appeared less likely than three months ago, but there was already “significant pain” across the economy.

“Consumer confidence remains extremely fragile, near its all-time low point. Business failures have also been on the rise through 2023, centred on construction but also affecting accommodation and food services, manufacturing and retail trade,” Mr Rumbens said.

Discussing the case for a rate hike, the minutes state: “It was noted that the rise in retail petrol prices would continue to underpin inflation over coming months and could influence households’ inflation expectations.”

A weaker Australian dollar was unhelpful “at the margin”, the minutes went on, while rising house prices presented more of a concern, especially if they negated some of the impact of higher rates by encouraging Australians to spend more.

“The rise in housing prices could also be a signal that the current policy stance was not as restrictive as had been assumed, although there was other evidence that monetary conditions were tight,” the minutes read.

“Members acknowledged that upside risks were a significant concern given how long inflation is likely to remain above target.”

CBA head of Australian economics Gareth Aird said there was a “live” chance of a rate hike at the next board meeting, but put the probability at 40 per cent.

“We don’t subscribe to the idea that the increase in home prices is a sign that monetary ­policy might be less restrictive than assumed,” Mr Aird said.

“Rather, we think that the recent lift in home prices primarily reflects the massive imbalance between surging population growth and supply. This mismatch is putting ­significant upward pressure on rents. And vacancy rates are at ­record lows in many parts of the country.”

Board members noted that inflation lifted from 4.9 per cent to 5.2 per cent between July and ­August, and that “progress in lowering services price inflation remained slow”.

“Nonetheless, headline inflation was still expected to decline over the second half of 2023, given the earlier slowing in growth in demand – particularly in the household sector – and the further decline in goods price inflation.”

Board members at the October 3 meeting did not see any strong evidence to shift them from a watching brief on the data, noting that the labour market, while still tight, had reached a “turning point”.

“The case to hold the cash rate target unchanged at this meeting centred on the observation that interest rates had been increased significantly in a short period, and that the effects of tighter policy would not be fully evident in the data on economic activity and inflation for some months,” the minutes read. “At the same time, inflation had abated from its peak in December 2022, consumption growth was weak and households’ real disposable incomes were still falling.”