According to the minutes from the Reserve Bank’s recent meeting, inflation continues to pose a significant threat to the economy, and the possibility of further interest rate hikes cannot be ruled out. Despite the previous twelve rate increases since May of last year, which have contributed to a slowdown in the economy, board members of the RBA have cautioned that inflation still remains too high.
While the cash rate was left unchanged at the meeting, the minutes reveal that the struggle to bring inflation back within the target range of 2 to 3 percent is far from over. Although headline inflation has shown signs of slowing, there are concerns about services inflation taking time to decline. Additionally, the tight labor market and a low jobless rate further contribute to worries about inflationary pressures.
If inflation remains consistently above target for an extended period, it may lead to higher inflation expectations and potentially require even larger rate increases. However, the board members also recognized that the economy is currently experiencing subdued growth, primarily driven weakened household consumption due to high inflation and interest rate rises.
Furthermore, the minutes highlight growing concerns surrounding China’s property market, which have led to financial stress among developers and increased the risk to economic activity. The board intends to monitor incoming economic data to assess the need for future rate hikes.
Although money markets currently assign a low probability of a rate rise at the RBA’s October meeting, the possibility of another rate increase before the end of the year exists if inflation returns or remains sticky. Economic adviser Warren Hogan speculates that there is an outside chance of a rate rise on Melbourne Cup Day in November, which could potentially address lingering inflation concerns.
As the minutes conclude, the focus shifts to the newly appointed RBA governor, Michele Bullock, who will chair the next meeting in October. The minutes do not reference Philip Lowe’s final meeting as Reserve Bank governor.
Definitions:
– Reserve Bank (RBA): The central bank of Australia, responsible for monetary policy, currency issuance, and the stability of the financial system.
– Cash rate: The target interest rate set the Reserve Bank, which influences borrowing costs and monetary conditions in the economy.
– Inflation: The sustained increase in the general price level of goods and services in an economy over time.
– Interest rate hike: An increase in the cost of borrowing money, implemented the central bank to manage inflation and economic growth.
– Labor market: The supply and demand dynamics of employment, including factors such as job opportunities, unemployment rates, and wage growth.
Sources:
Original Article – Peter Ryan, ABC News Australia, September 17, 2021
