The national accounts showed the economy grew by just 0.4% in the June quarter, partly supported by spending on data centres. Unemployment rose to 4.6% in August.
The fourth rate hike this year will add about A0 a month to the average mortgage of 0,000. Over the course of the year, the four rate rises have added about 0 a month to the average family’s repayments, dampening spending elsewhere in the economy.
Treasurer Jim Chalmers has pointed to the ongoing fuel price shock from the conflict in the Middle East for higher inflation. He told a press conference:
Bullock has become increasingly explicit about this problem, saying unemployment may need to rise further to reduce inflationary pressure.
The board will continue to do what it considers necessary to bring inflation sustainably back to target, including increasing the cash rate target further if needed.
Inflation seems stuck above 3%
Domestic spending and investment have been stronger than expected, despite weak sentiment and the softening in housing rates and conditions.
New data on Tuesday showed household spending was flat in August, after rising 1.1% in July.
The decision highlights the increasingly difficult trade-off facing the RBA: inflation is still too high, but the economy is already losing momentum and the housing market is weak.
Higher fuel prices are already being passed through to other goods and services.
However, the RBA’s statement makes clear it sees both global and domestic pressures at work. Global energy prices are much higher than it assumed in August. The bank also pointed to AI-related demand pushing up prices for technology goods.
The economy was also a little stronger in the June quarter than the RBA had expected. Together with stronger-than-expected inflation outcomes, this contributed to the board’s conclusion that “a further tightening in financial conditions is warranted”.
The RBA said some of the risks of higher inflation it identified in August are now materialising.
The longer inflation stays high, the greater the risk it becomes embedded in wages and prices. Workers may seek higher pay to offset living costs, prompting businesses to raise prices further – creating the risk of a wage-price spiral.
Asked specifically about the risk of recession, RBA Governor Michele Bullock told reporters it was not the bank’s central case “at this point”.
The RBA will receive more inflation data on Wednesday, and more employment and household spending data before its next meeting.
The RBA explicitly left the door open to another rate increase, saying:
At home, demand is still running ahead of the economy’s ability to supply goods and services, with firms reporting higher costs and either raising prices or considering doing so.
The latest figures do not describe an economy that is booming.
The challenge now is whether the RBA can bring inflation under control without causing a sharper slowdown than intended – or even a recession.
Why the RBA hiked
Higher rates are also making it harder for first homebuyers. New research has shown each hike could lock out some 30,000 potential buyers by reducing their borrowing capacity.
Read more:
What exactly is inflation, and are interest rates the only option for dealing with it?
And households are worried. The Westpac-Melbourne Institute Consumer Sentiment Index fell 5.2% in September, taking confidence back towards deeply pessimistic levels.
According to the latest official inflation data, annual inflation was 3.5% in July. Underlying inflation remained at 3.6%, still clearly above the RBA’s 2–3% target range.
This rate rise will put further pressure on mortgage holders, household spending and businesses.
Three of the four major banks brought forward earlier forecasts for a November rise to September.
The economy is slowing – but not everywhere
ANZ is currently the only major bank forecasting another hike, while Commonwealth Bank, Westpac and National Australia Bank expect the RBA to stop after September.
With housing, household spending and the labour market already weakening, the risk of the RBA going too far is growing.
Our inflation challenge is being turbocharged by a war on the other side of the world.
However, workers have less bargaining power than in the past, making this less likely.
There are, however, pockets of strength. Business investment and debt are still growing strongly. This helps explain why the RBA is not yet convinced the economy has slowed enough to remove inflation pressure. Bullock told reporters:
The housing market is weakening, too. National home values fell 0.9% in August, the fifth consecutive monthly decline, leaving prices 3.6% below the March peak.
But interest rates work with a lag, meaning the hikes from February to May are still flowing through the economy.
Interest rate moves cannot lower global oil prices, but the RBA can try to stop these higher costs from spreading further through the economy.
What happens in November?
The danger is that today’s increase could slow the economy too sharply.
The question now is whether the RBA will need to raise rates again in November.
The problem is not simply that inflation is above target. It has also proved more persistent than expected.
The board said overall demand needs to remain subdued for a period to ease pressure on prices and prevent high inflation becoming embedded.
The Reserve Bank of Australia has raised the cash rate to 4.6% from 4.35%, taking the key rate to its highest level since late 2011 as it battles persistent inflation.
After weeks of warnings on inflation from senior RBA officials, the board’s decision was unanimous.
Those figures will help determine whether today’s increase is enough, or whether the RBA decides further tightening is still needed.
