investor daily logo

RBA tempers hawkishness as rate hike risks heighten

By Charbel Kadib
4 minute read

The Reserve Bank has held back from adopting a more hawkish monetary policy posture despite evidence of resurgent inflation.

The official cash rate was left on hold at 4.1 per cent following the Reserve Bank of Australia’s (RBA) monetary policy board meeting on Tuesday (3 October) – the fourth consecutive hold following 400 bps of cumulative tightening since May 2022.

The post-meeting statement retained a hawkish bias, noting inflation remained too high despite passing its peak.

But overall, the statement was largely unchanged, despite a flare up in the consumer price index (CPI).

The latest monthly CPI reported a 5.2 per cent increase in the year to August following a 4.9 per cent rise in the previous print.

The RBA acknowledged the continued softening in goods price inflation but flagged services inflation has continued to “rise briskly”.

“Returning inflation to target within a reasonable timeframe remains the board’s priority,” the RBA noted.

“High inflation makes life difficult for everyone and damages the functioning of the economy.”

Ultimately, the RBA said it needs more time to assess the broader impact of its previous interest rate hikes.

“The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so,” the RBA stated.

“In light of this and the uncertainty surrounding the economic outlook, the board again decided to hold interest rates steady this month.”

The central bank remains open to actioning further increases to the cash rate if future economic indicators alter inflation expectations.

“Some further tightening of monetary policy may be required to ensure that inflation returns to target in a reasonable timeframe, but that will continue to depend upon the data and the evolving assessment of risks,” the RBA noted.

“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 board remains resolute in its determination to return inflation to target and will do what is necessary to achieve that outcome.”

Reflecting on the RBA’s latest decision, Dr Dwyfor Evans, head of APAC macro strategy at State Street Global Markets, said energy costs would heavily influence the trajectory of interest rates.

“Our PriceStats Australia series indicates substantial fuel and energy-based price rises in August and September. How this filters through to inflation expectations will be crucial,” he said.

However, according to Harvey Bradley, portfolio manager at Insight Investment, the fourth consecutive cash rate hold suggests it is becoming “increasingly apparent” the RBA considers it has “tightened financial conditions sufficiently”.

“The economic data coming in line with expectations during September has likely reinforced this belief,” Mr Bradley said.

“Australian government bonds were little changed after the meeting given the no change and associated commentary was in line with expectations.”

But he acknowledged upcoming monetary policy board meetings would “remain live”, making markets “very sensitive” to the incoming data.

“The risks for growth remain to the downside but the risks for inflation remain to the upside,” he said.

“We expect that the RBA will be on hold for an extended period, until they can be confident inflation has returned to their target on a sustainable basis.”

ANZ Research said the RBA’s latest statement has not shifted its projections for a prolonged pause to monetary policy settings.

“Overall, while the risks of additional RBA action might be rising, we see nothing in today’s decision or statement to push us off our view that the RBA is on an extended pause as it examines how the monetary tightening to date washes through the economy,” ANZ stated.

According to the Commonwealth Bank, the cash rate would likely remain unchanged “well into 2024” before easing commences.

“We expect a gradual monetary policy easing cycle to get underway in May next year, progressively taking the cash rate down to a more neutral level,” CBA noted.