The minutes read hawkish, not unexpectedly, with the board explicitly keeping further hikes on the table and markets already pricing roughly another 15 basis points by year-end and 30 basis points in the first half of 2027. Oil is central to the outlook: domestic fuel prices were running well above the RBA’s August assumptions, and any further escalation of the Iran war would feed directly into the risk of more tightening. The board’s concern that a lagging RBA could weaken the Australian dollar suggests it is willing to keep pace with other central banks, which should support the currency against a backdrop of rising global yields. Rate-sensitive sectors such as banks, property and consumer discretionary remain vulnerable, given falling house prices and the board’s view that household spending must stay subdued for some time.
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The RBA has concluded the economy is running hotter and the neutral rate is higher than it thought, which is central bank language for “we may not be done yet”.
Summary:
- The Reserve Bank of Australia board voted unanimously at its 28 to 29 September meeting to raise the cash rate by 25 basis points to 4.60%
- Members said all three upside inflation risks flagged in August had materialised or were building: a broader Middle East conflict lifting oil prices, cost pressures from the global AI boom, and tighter domestic capacity than assumed
- Staff now question whether the unemployment rate consistent with target inflation is higher than thought, implying more excess demand, with unemployment at 4.6% in August
- The board said a possible rise in the global neutral rate meant the previous 4.35% setting was less restrictive than two years ago, and that standing still could weaken the Australian dollar
- Members accepted slower growth in demand and jobs as the cost of returning inflation to target, and said they would raise rates further if required
- On financial stability, the board flagged mounting global risks from bond markets and possible abrupt repricing of AI-related assets, while judging Australian borrowers resilient
The Reserve Bank of Australia raised interest rates last month because several of the upside risks to inflation it had flagged in August had either materialised or were building, according to minutes of the 28 to 29 September meeting released on Tuesday. The board signalled it was prepared to tighten further if needed.
The board voted unanimously to lift the cash rate by 25 basis points to 4.60%. Members said the August forecasts, which had inflation returning to the midpoint of the target range by around late 2027, depended on a series of favourable developments that no longer looked likely to all occur.
The minutes set out three main arguments for the move. First, the risks identified in August had largely come to pass. The Middle East conflict had broadened and oil prices were well above the level assumed in the forecasts, with domestic petrol and diesel prices running about 13% higher than projected. Global cost pressures were intensifying, driven partly by extraordinary demand for AI-related products, and domestic capacity appeared tighter than assessed. Second, members judged that responding quickly would best balance their inflation and employment goals, given inflation has been above target for an extended period and surveys point to a risk that business inflation expectations are rising. Third, the board said the cash rate might not be high enough to restore balance within a reasonable timeframe even if the risks did not fully materialise.
That last point reflected a significant shift in thinking about the neutral interest rate, the level at which policy neither stimulates nor restrains the economy. Members said that if market signals of a higher global neutral rate were correct, the previous 4.35% cash rate was less restrictive than it had been two years earlier. They added that if the RBA held still while other central banks tightened, Australian financial conditions could loosen through a weaker currency.
On the economy, the board noted June quarter growth was a little stronger than expected, driven by business investment that rose more than 10% over the year, partly reflecting data centre and renewable energy construction. Household consumption slowed to a below-trend pace, house prices fell faster than expected, and unemployment rose to 4.6% in August. Staff increasingly questioned whether the unemployment rate consistent with target inflation is higher than previously thought, which would mean more pressure on capacity than estimated. Unit labour cost growth, driven by weak productivity rather than strong wages, also remained above levels consistent with the target.
Members acknowledged the trade-off between inflation and employment had worsened because of global cost pressures, and said returning inflation to target would require accepting slower growth in demand and jobs. The board will remain attentive to incoming data and said it will do what is necessary, including increasing the cash rate further if required.
This article was written by Eamonn Sheridan at investinglive.com.