Reserve Bank of Australia issues dark warning of a Melbourne Cup interest rate hike

The Reserve Bank has strongly hinted it could raise interest rates again on Melbourne Cup Day, saying it had a “low tolerance” for inflation remaining high for too long.

The dark warning was contained in the minutes of the October RBA meeting – the first that Michele Bullock chaired as governor.

Cash rates hit an 11-year high of 4.1 percent this month, but the minutes hinted that rates could rise again for the 13th time since May 2022 as inflation was still too high.

The minutes read: ‘In reaching their decision, members noted that further policy tightening may be necessary if inflation proves to be more persistent than expected.

“The board has a low tolerance for a slower return of inflation to target than currently expected.

‘Whether or not a further increase in rates is necessary will therefore depend on the incoming data and how it will change the economic outlook and the evolving assessment of risks.’

The aggressive language in the minutes is more frank than the words of Bullock’s predecessor Philip Lowe and is reminiscent of her speech to business leaders in Newcastle in June, where she said: “It could be much easier just to raise interest rates.”

Inflation rose to 5.2 percent in August, up from 4.9 percent in July, marking the first monthly deterioration in the consumer price index since April, despite the Reserve Bank raising interest rates at the heaviest pace since 1989.

This pushed inflation further above the RBA’s two to three per cent target, and the Reserve Bank does not expect the CPI to fall back into that range until mid-2025.

ANZ head of Australian economics Adam Boyton said high inflation for the September quarter on October 25 could lead to a rate hike in November.

“The November meeting seems quite ‘live,’” he said.

“We believe that a rate hike in November would require an uncomfortably high CPI, possibly combined with a sign of strength in the labor market.”

The Reserve Bank meeting on October 3 came four days before Hamas’s terrorist attack on Israel, which has fueled fears of higher crude oil and petrol prices.

Petrol prices rose 14 per cent in the year to August, with unleaded E10 petrol now selling for more than $2 per litre.

But AMP chief economist Shane Oliver said higher petrol prices would only cause consumers to cut back on spending, giving sellers less room to pass on price rises, as they did in early 2022 when Russia invaded Ukraine.

‘A further increase in oil and petrol prices will be a “spending tax” rather than a further boost to inflation and will therefore be deflationary, making it very difficult to pass on higher fuel and transport costs to consumers outside the boundaries of the world. direct impact of the higher petrol price,” he said.

“This means that it will mainly increase the risk of a recession.”

Credit monitoring agency illion said that even without interest rate increases, consumers would struggle to pay off their credit cards, with stress levels rising by 11 percent in the last financial year.