Key Points
- The Reserve Bank of Australia has announced that it will increase interest rates if inflation does not fall.
- The bank aims for inflation to fall to 2-3 percent next year, but it is not on track to achieve that goal.
- Economists say the market continues to believe the bank will cut rates over the next three months.
The Reserve Bank of Australia (RBA) has said it will raise interest rates further if necessary as it foresees a rocky path towards its inflation reduction target.
The bank considered raising interest rates at its last meeting in early August and could decide to do so in September if inflation does not tend to fall below the bank’s targets, minutes released today reveal today.
Tony Sycamore, market analyst at financial markets trading firm IG, said the Reserve Bank was concerned about consumer spending following energy rebates and the third phase of tax cuts and that it could follow through on threats to raise interest rates at its next meeting.
He added that the market was not convinced the bank would raise rates and that he had forecast a rate cut by the end of the year due to rising unemployment and a slowing economy .
The RBA said the risk that inflation will not return to the 2 to 3 percent target next year has “increased significantly… due to several developments”, and the bank could act to raise the interest rates and avoid pushing back inflation. chronology.
“Members asserted that their strategy was always to return inflation to its target within a reasonable period of time, and their tolerance for further extension of this deadline was limited,” the RBA minutes said .
The bank is concerned by the development of the situation, in particular by the increase in domestic demand for goods and services, but above all by the slow decline in inflation.
The RBA noted that households are struggling, but consumer spending is still contributing to inflation.
He says third-stage tax cuts and energy rebates could lead to a temporary increase in spending, which could further exacerbate inflation.
After the RBA decided to keep interest rates at 4.35 percent at its August meeting, RBA Governor Michele Bullock suggested a rate cut might not come until at least six months.
Independent economist Saul Eslake said it was notable that Bullock, “having previously disavowed any intention of providing ‘forward guidance,’ then moved to rule out a ‘short-term’ interest rate cut.” .
“So it would appear that the RBA thinks it has tightened its monetary policy. [a bit] by openly pricing the market downward on a series of rate cuts between November of this year and the middle of next year, rather than explicitly increasing the cash rate,” Eslake wrote in a statement.
What does the data reveal about consumer confidence?
Sycamore said this week’s ANZ-Roy Morgan consumer confidence data showed “mixed results”.
The overall index fell 0.9 points to 83 this week.
However, looking at annual data, consumer confidence is 7.2 points higher than 12 months ago (75.8 points) and is now 2.1 points above average weekly of 81.9 for 2024.
Sycamore said consumer confidence was being influenced by the RBA and households were relieved that rates were being held.
“I don’t think the RBA would be too concerned about a month of rising consumer confidence data,” he said.
“But if for some reason it’s the end of the year and people are spending more because of the tax cuts, that could certainly make the RBA start thinking ‘hang in there’, we need to brake again here.”
Eslake said: “Time will tell whether the Council made the right judgment.”
“They consciously chose to tolerate inflation above their target range for longer than their peers were willing to tolerate inflation above their respective target range. [lower] objectives in order to preserve as much as possible the gains made in reducing unemployment and underemployment to levels previously thought inaccessible, or unattainable.
