Fin-X Rapid Response - 30th September
The RBA increased the cash rate by +0.25% to 4.60% today as widely anticipated. The RBA still sees inflation risks as skewed to the upside, but the market doesn't anticipate more than two more increases, at most, by the end of 2027 as the governor struck a less hawkish tone.
Yesterday, the Board raised the cash rate by +0.25% to 4.60%. The vote was unanimous, but a hold was also considered.
It was the fourth hike of 2026 to the highest level since 2011.
The move was well telegraphed in advance, and markets were not surprised.
The statement was reworded with the governor saying in the statement that: "Inflation remains elevated and some of the upside risks flagged in August are materialising. The conflict in the Middle East has broadened and global energy prices are now much higher than had been assumed in the August forecasts. AI-related demand is driving rapid growth in global prices for technology-related goods. And there remains pressure on domestic capacity. Liaison indicates that firms are experiencing cost pressures and are either increasing the prices of their goods and services or looking to do so. Short-term measures of inflation expectations remain elevated. And recent inflation outcomes in Australia were stronger than expected at the previous meeting.
"Growth in output has slowed but, at the margin, was stronger than expected in the June quarter".
On the decision, she said: "Since the previous meeting, some of the upside risks to inflation are materialising. There have been further disruptions to global oil supply and recent data suggest that growth and inflation in Australia have been higher than expected. Higher fuel prices have partially been passed through to prices of other goods and services. This inflation impulse is in addition to the effect of capacity pressures in the economy.
"The Board remains focused on ensuring that high inflation does not become embedded. To achieve this, growth in aggregate demand needs to remain subdued for a period to reduce capacity pressures and bring inflation back to target. The three increases in the cash rate target since the beginning of the year have tightened financial conditions and the economy appears to be slowing. But inflation is still too high and the Board judged that, in light of recent developments, a further tightening in financial conditions is warranted to support a return of inflation to target in a reasonable period."
At the press conference suggested that AI costs were being passed on by businesses.
If inflation expectations are not prevented from rising, the governor said that "the problem will only get worse."
Earlier Yesterday, August's annual growth in household spending fell short of expectations, falling by -0.2% to +6.8% yoy, compared to the latest consensus forecasts of an increase to +7.1% yoy.
S&P/ASX200 8,694 +0.2%, AUDUSD 0.6988 -0.43%, Aus 2yr 4.99% -6bps, Aus 10yr 5.38% -4bps
Fin-X View
The governor made it clear that the Reserve Bank is trying to tighten conditions to constrain demand and allow supply to catch up.
Confirming that the Board had not seen tomorrow's number, she said that it wasn't yet clear whether this rate rise, added to the three earlier this year, would be sufficient to constrain inflation.
There are three issues that the Board is concerned about: the Middle East conflict, its duration, and the potential for higher inflation expectations, AI and data centre spending, and domestic capacity constraints.
Housing weakness is not a barrier to rate hikes and may help to bring inflation down. But weak productivity growth remains a concern and represents a headwind for real wages growth and living standards.
The next decision in November will be accompanied by updated quarterly forecasts. With the governor outlining that risks are skewed to the upside, the market is pricing an 80% chance of another rate hike, but no more than two more by the end of next year, as the hawkish tone was today softened to a more balanced outlook.
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