RBA signals more rate hikes are on the table

Minutes from the Reserve Bank’s September monetary policy meeting published on Tuesday revealed the Board had grown more concerned about the inflation outlook since its August forecasts. 

The Board unanimously lifted the cash rate by 25 basis points to 4.60% at its September meeting on the back of upside risks to inflation materialising. 

See which banks have increased savings account rates after RBA September hike.

See also: Is your lender passing on the September cash rate hike?

Why did the RBA hike? Upside risks have materialised

The minutes echoed the post-meeting statement, reading, "several of the upside risks identified in August had since materialised or were building."

"The strongest argument for raising the cash rate target at this meeting was that several of the upside risks identified in August had since materialised or were building," the minutes said.

The Board noted global energy prices had risen sharply as the Middle East conflict broadened, while demand associated with the global AI boom was adding to cost pressures in supply chains.

Domestically, the Board said July inflation data came in stronger than expected, leading staff to expect higher underlying inflation in the September quarter than previously forecast.

Members concluded that "these domestic and global developments pointed to an increase in the risk of persistently elevated inflation".

But also, policymakers increasingly concerned about inflation

The minutes also suggest the decision was driven as much by concerns about future inflation as current conditions. 

In voting to increase the cash rate, members argued that responding quickly to rising cost pressures was preferable to waiting for further confirmation of inflation outlook.

See also: Why Australia’s inflation fight led to 15-year high interest rates

"Members also noted that growth in consumption would need to be subdued for some time if inflation was to return to target," the minutes read. 

The RBA Board also questioned whether the current cash rate setting would be sufficient "to bring the economy back to balance within a reasonable timeframe".

Housing downturn fails to sway Board

The Board acknowledged that housing prices had weakened more than expected, "briefly considering" its effect on household spending in discussing whether to leave the cash rate unchanged.

"Housing prices had declined by more than expected and new housing loan commitments had fallen sharply, led by lending to investors," members noted. 

Latest Cotality Home Value Index (HVI) fell by another 0.9% in August, leaving the national dwelling prices 3.6% below their March peak. 

All big four banks, which together account for almost three-quarters of Australia’s home lending, earlier revealed major falls in new mortgage applications, with Westpac reporting a 20% plunge in investor loan applications.

The latest Equifax report revealed overall mortgage demand dropped 19.2% in September. 

"Rather than taking on expanded debt commitments in a sustained high-rate environment, Australian households are taking a decisive step back," Equifax chief solution officer Kevin James said.

However, policymakers appeared unconvinced that weaker housing conditions would materially weaken broader economic activity.

The minutes said RBA analysis suggested, "even relatively large falls in housing prices would have only modest direct effects on activity and spending".

RBA warns economy still running above capacity

Despite unemployment rising to 4.6% in August and household consumption slowing, members pointed to resilient business investment, stable labour demand and persistent cost pressures across the economy. 

The Board concluded that "it was reasonable to conclude that excess demand in the economy was greater than members had previously assessed".

Members also highlighted elevated growth in unit labour costs, widespread reports of rising business costs and growing evidence that productivity growth remains subdued.

More hikes remain on the table

In discussing the policy outlook, members said they would continue monitoring developments in inflation, demand and global conditions. 

But they also acknowledged that the trade-off between inflation and full employment had deteriorated because of global cost pressures. 

The RBA has a dual mandate to maintain price stability and employment gains. 

"The Board will continue to do what it considers necessary to achieve that outcome, including increasing the cash rate target further if required," the minutes stated.