The Board considered both options but the case for on hold was clearly stronger. The Board is maintaining its options to hike again if inflation surprises to the upside.
The Minutes for the September meeting show that the Reserve Bank Board continued to consider two policy options.
The options are whether to hold the cash rate steady or to lift it by 0.25%.
As recently as June, the Board had described the final decision as “finely balanced”. It is now describing the decision in terms of a clear winner: “in weighing up the two options, members agreed that the case to keep the cash rate target unchanged at this meeting was the stronger one.” This choice of “stronger argument” has now been used since the July meeting when the Board first went on hold.
Since late last year the Board has considered its decision in the context of two issues. Firstly, to raise the cash rate due to concerns about taking more time than planned to return inflation to the target; or secondly, to hold steady because policy had already been tightened substantially, there were signs that the economy was slowing, conditions in the labour market were easing and inflation was coming down.
Whereas the former argument prevailed in May and June, the latter argument has now prevailed for the last three months and looks like being sustained for the remainder of the cycle.
The latter arguments are clearly to the fore in the September Minutes and it seems likely that the discussion around raising rates would have been quite short.
The Minutes also address the argument that Australia’s cash rate is too low relative to other countries: “Members noted that the average outstanding mortgage rate in Australia was now higher than in several other peer economies, despite the policy rate in Australia being somewhat lower; this reflects the higher share of variable-rate mortgages in Australia and shorter maturity of fixed rate loans.” This is a clear rebuttal to those analysts that argue that the RBA’s cash rate must rise to align with other developed countries, including the US, where the rate is 5.375% – well above Australia’s 4.1%.
But despite these clear arguments, the Board still concludes that “some further tightening in policy may be required should inflation prove more persistent than expected.” This statement compares with August: “members agreed that it was possible that some further tightening of monetary policy might be required to ensure that inflation returns to target in a reasonable timeframe.”
That approach leaves the Board with options in the event of some unexpected and sustained lift in inflation, certainly putting the Q3 CPI report right to the fore. The Monthly CPI Indicators will also play a role in the decision but are unlikely to trigger a rate hike without confirmation from the quarterly report.
Based on our own forecasts, and the clear tone of the Minutes, we expect that the “hurdle” for an inflation induced rate hike at the November meeting is quite high.
It is also advantageous of the Board to maintain the tightening option to support the AUD. The sharp deterioration in the AUD over the last month is already putting some pressure on domestic fuel prices and further falls in AUD would be unhelpful to the Board.
Westpac maintains its call that the cash rate will remain on hold until the easing cycle can begin from the August meeting next year.
It is interesting that markets currently have around a 40% chance of another rate hike in this cycle and have now delayed their timing of the first cut to well beyond our August target.
