The Reserve Bank has signalled that inflation remains a clear and present danger to the economy and another interest rate rise can’t be ruled out.
- Rising petrol prices could complicate the picture
- Another rate hike this year can’t be ruled out
- Economic activity is slowing, and there are concerns about China’s worsening economy
It says the recent rise in petrol prices clearly demonstrates the process of returning inflation to target could be uneven.
That’s despite evidence that twelve interest rate rises since May last year are continuing to slow the economy.
While the RBA board left the cash rate on hold at its meeting a fortnight ago, the minutes of the meeting released this morning show the battle to get inflation down from 4.9 per cent to the 2 to 3 per cent target zone is far from over.
It was Philip Lowe’s final meeting as Reserve Bank governor.
Inflation ‘still too high’
In considering whether to inflict another rate hike on households, the RBA Board noted that inflation was “still too high” and “was expected to remain so for an extended period”.
While headline inflation is slowing, the minutes show there is concern that services inflation might take a while to decline.
Members also noted the labour market remained tight, with the jobless rate hovering near a 50-year low.
“Were inflation to remain above target for an even longer period, this could cause inflation expectations to move higher which would likely require an even larger increase,” the minutes warn.
However, members also note that the economy is “experiencing a period of subdued growth” led by household consumption, as high inflation and rate rises weigh on household budgets.
As the impact of rapid rate rises work their way through the economy, the Board noted there was a risk “the economy could slow more sharply than forecast” — in other word, a hard economic landing.
The minutes show a deepening concern about China where conditions in the property market have deteriorated further.
“Members noted .. significant challenges from financial stress among developers and further defaults posed a risk to economic activity.”
Board members said they would be guided by incoming economic data in assessing the need for further hikes.
Money markets only see an 8 per cent probability of a cash rate rise to 4.35 per cent at the RBA’s October meeting.
However, if inflation makes a comeback or remains sticky, there’s an outside chance of another rate rise before the end of the year.
Judo Bank economic adviser Warren Hogan sees the outside chance of a November rate rise on Melbourne Cup Day as the final nail in the coffin of inflation.
The minutes make no mention of the fact that it was Philip Lowe’s final meeting as RBA governor.
Today, it is Michele Bullock’s second day as RBA governor and she will chair the next meeting on October 3.
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