Australia central bank saw upside risks to inflation lingering after September rate hike

Minutes from the Reserve Bank of Australia's September board meeting released on October 13 indicate that the central bank still sees potential for inflation to remain higher than anticipated due to domestic demand and rising global energy costs. At their September 28-29 meeting, the nine-member board unanimously decided to increase interest rates to 4.6 percent, despite briefly considering keeping rates steady.

The rationale for tightening included stronger-than-expected demand and global cost pressures stemming from the Middle East conflict. Board members emphasized the need to respond promptly to anchor inflation expectations, as current financial conditions were judged restrictive but only moderately so. They also noted the possibility that financial conditions could ease if the Australian dollar weakened in response to monetary policy remaining unchanged, if other countries were tightening their policies as well.

The board acknowledged the difficulties in gauging the extent of upside risks to inflation, stating that it would depend on developments in the Middle East, external demand, domestic capacity pressures and the transmission of cost shocks. While there were limited arguments for maintaining the status quo, such as falling housing prices and potential demand impact from the Middle East conflict, markets estimate a 30% probability of a further rate hike to 4.85 percent at the next meeting on November 3 and 4.

That probability rises to 50% for December, with a full pricing in of a rate increase by May the following year. The board also approved Term Repo Operations to provide longer-term liquidity to the market, to be operational in 2027.