RBA minutes raise concerns about another rate hike before Christmas
The RBA sent a shudder through the markets today with a warning that it was taking too long to reduce inflation.
Huge gaps were emerging in mortgage rates with some as high as 9 per cent (file photo)
The ASX 200 index dropped more than 40 points following the release of RBA board minutes in which the board said it had “a low tolerance for a slower return of the inflation target than currently expected.”
Markets saw that as a “hawkish” reaction that could lead to further interest increases.
However, ANZ economists said a rate hike at the November meeting of the RBA board would require an uncomfortably high inflation spike with a possible combination of a strengthening labour market.
Westpac said the board now appeared willing to increase rates, but only if there was an upside surprise in inflation.
The slow decline in inflation was highlighted in the RBA minutes where it said the monthly consumer price index showed that lowering services price inflation remained slow and that petrol prices were expected to underpin high inflation over the coming months.
“Members (of the board) acknowledged that upside risks were a significant concern given how long inflation is likely to remain above target,” it said.
Coolibah Capital portfolio manager Christopher Joye said RBA also showed it was also worried about house prices and the associated increase in household wealth.
That increase could support more consumption, especially if housing turnover increased.
“The rise in housing prices could also be a signal that the current policy stand was not as restrictive as had been assumed, although there was other evidence that monetary conditions were tight,” the minutes said.
Economist Warren Hogan said the RBA was sharpening its pencils for another rate hike in November.
“Looks like the next CPI report will need to be soft to keep rates on hold. A strong CPI next week could move the conversation to whether we get two hikes before Xmas,” Hogan said.
The board minutes also show how the RBA has become focused on data and that before the November meeting, it would receive additional information on economic activity, inflation and the labour market.
The RBA believes that unemployment had reached a turning point after hitting record lows.
