The Reserve Bank has hinted it could raise interest rates to an 18-year high at its next meeting in three weeks’ time.
Its nine-member monetary policy board unanimously voted to raise the cash rate to a 15-year high of 4.6 per cent, marking the fourth hike this year and the 16th since Labor came to power four years ago.
But more pain is likely with inflation in August remaining above the RBA’s 2-3 per cent target for the 13th straight month.
“The board will remain focused on its mandate to deliver price stability and full employment and will continue to do what it considered necessary to achieve that outcome, including increasing the cash rate target further if required,” the minutes of the September 28-29 meeting released on Tuesday said.
Another rate hike on November 3 would take the RBA cash rate to 4.85 per cent, which would be the highest borrowing cost since December 2008 and mark the fifth increase this year.
The futures market regards an increase at the next meeting as only a 27 per cent chance.
But the Reserve Bank minutes noted the board was particularly concerned about the Middle East conflict adding to inflationary pressures, with headline inflation in August rising to 4 per cent, from July’s 3.5 per cent level, following Iranian militia-backed drone strikes on Saudi Arabia’s East-West pipeline.
“The risk of a re-escalation of the Middle East conflict had since crystallised. Global energy prices were significantly higher than assumed in August, reflecting ongoing disruptions to shipping, damage to refineries and low inventory levels,” it said.
Outside the Iran war, Australia has a bigger homegrown inflation problem with non-tradables inflation, reflecting domestic price pressure, rising by 4.5 per cent compared with 2.9 per cent for tradables inflation linked to imports.
“While the monthly data can be volatile, the staff’s preliminary assessment – based on sub-components of the consumer price index – was that the upward surprise in underlying inflation was more likely to reflect greater domestic capacity pressures than unexpectedly strong pass-through of cost increases flowing from the Middle East conflict,” the minutes said.
“Members concluded by discussing what these developments implied for their judgement about domestic capacity pressures and their impact on the inflation outlook.”
More to come