Key Points
- The Reserve Bank of Australia has said it will raise interest rates if inflation does not decrease.
- The bank aims for inflation to fall to 2-3 per cent next year, but it is not on track to meet this target.
- Economists say the market still thinks the bank will cut rates in the next three months.
The Reserve Bank of Australia (RBA) said it will raise interest rates further if it needs to, as it predicts a rocky ride to its goal of lowering inflation.
The bank considered raising interest rates at its latest meeting in early August and may decide to do so in September if inflation does not trend towards falling below the bank's targets, minutes published today reveal.
Tony Sycamore, market analyst at financial markets trading firm IG, said the Reserve Bank has been concerned about consumer spending following energy rebates and stage three tax cuts and could follow through on threats to raise interest rates at its next meeting.
He said that the market is not convinced the bank will raise rates and has priced in a rate cut by the end of the year due to rising unemployment and a slowing economy.
The RBA has judged that the risk of inflation not coming down to the target of 2-3 per cent next year has "increased materially ... because of several developments", and the bank could act to raise interest rates and avoid pushing back the timeline.
"Members affirmed that their strategy was still to bring inflation back to target within a reasonable timeframe, and their tolerance for this timeframe being pushed out further was limited," the RBA minutes state.
The bank is concerned about developments, including the rise in domestic demand for goods and services, but primarily about the sluggish pace at which inflation is falling.
The RBA noted that households are struggling, but consumer spending is still contributing to inflation.
It says stage three tax cuts and energy rebates could cause a temporary lift in spending, which could further exacerbate inflation.
After the RBA elected to keep interest rates on hold at 4.35 per cent at its August meeting, RBA governor Michele Bullock hinted a rate cut may not come for at least six months.
Independent economist Saul Eslake said it was notable that Bullock, "having previously disavowed any intention of giving 'forward guidance', subsequently went to some lengths to rule out a cut in the cash rate 'in the near term'".
"So it would seem that the RBA thinks it actually has tightened monetary policy [a bit] by overtly staring down market pricing of a series of rate cuts between November this year and the middle of next year, rather than by explicitly raising the cash rate," Eslake wrote in a statement.
What does consumer confidence data reveal?
Sycamore said this week’s ANZ-Roy Morgan Consumer Confidence data showed "mixed results".
The overall index dropped 0.9 points to 83 this week.
However, looking at yearly data, consumer confidence is 7.2 points above where it was 12 months ago (75.8 points) and is now 2.1 points above the 2024 weekly average of 81.9.
Sycamore said consumer confidence is influenced by the RBA, and households were relieved rates were kept on hold.
"I don't think the RBA would be concerned too much by one month of consumer confidence data rising," he said.
"But if for some reason it's a year-end and people are spending more because of tax cuts, that could certainly be caused for the RBA to start thinking 'hang on', we've got to slam the brakes on again here."
Eslake said: "Time will tell whether the Board has made the right judgement."
"They've consciously chosen to tolerate inflation being above their target range for longer than their peers have been prepared to tolerate inflation being above their respective [lower] targets in order to preserve as much as they can of the gains made in reducing unemployment and under-employment to levels previously thought unattainable, or unattainable."
