Australia's Central Bank Leaves Door Open to Another Rate Hike in New Minutes

Reserve Bank of Australia Leaves Door Open to Another Rate Hike in New Minutes. In brief: The Reserve Bank of Australia unanimously raised the cash rate by 25 basis points to 4.60%. Three main factors shaped the decision: inflation risks in the Middle East, cost pressures linked to artificial intelligence, and domestic capacity constraints. The bank has said it will raise rates further if necessary. Minutes […]

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Minutes of the Reserve Bank of Australia's September meeting show that board members unanimously voted to raise interest rates to 4.60 percent. In this meeting minutes, the three main factors of this decision have been explained and the central bank has announced that it will increase the interest rate again if necessary. The decision to increase by 25 basis points was made in the meeting on September 28 and 29.

The three main factors behind the rate increase were the realization or exacerbation of inflationary risks that were raised in August: the spread of conflict in the Middle East and the increase in oil prices, the cost pressure caused by the global boom in artificial intelligence, and the domestic capacity of the economy being more limited than previously estimated.

Board members also concluded that a faster response could help strike a balance between containing inflation and preserving employment; Especially considering that inflation has been higher than the target for a long time and surveys have indicated the possibility of increasing inflationary expectations of companies. Another factor was that even if all inflationary risks did not materialize, interest rates might not be sufficient to rebalance the economy within a reasonable time frame.

In the assessment of the central bank, the conflict in the Middle East has expanded and the price of oil has risen above the level assumed in the August forecasts. The domestic price of gasoline and diesel was also about 13% higher than the estimates of that time. At the same time, global demand related to artificial intelligence products has fueled increased cost pressures, and the domestic capacity of the economy appears to be more limited than previously assessed.

This meeting minutes also tells about the review of the evaluation of the neutral interest rate; A rate that neither stimulates the economy nor limits it. Members said if market signs of a rise in the global neutral rate are correct, the previous rate of 4.35 percent would be less restrictive than two years ago. If the Reserve Bank of Australia keeps rates steady while other central banks raise them, a weaker Australian dollar could ease domestic financial conditions, they added.

Economic growth in the June quarter was slightly stronger than expected, and corporate investment increased by more than 10% in a year; Part of this growth was related to the construction of data centers and renewable energy projects. On the other hand, the growth of household consumption fell below the usual trend, housing prices fell faster than expected and the unemployment rate reached 4.6% in August.

The central bank staff investigated the possibility that the inflation-adjusted unemployment rate is higher than previously estimated; An issue that can mean more surplus demand in the economy. The growth of labor costs per unit of production was still higher than the level consistent with the inflation target; A problem that the text attributes more to the weakness of productivity than to the sharp growth of wages.

Board members agreed that returning inflation to target would come at the cost of slower growth in demand and employment. In the financial stability section, the minutes also mention the increase in global risks related to the bond market and the possibility of a sudden revaluation of assets related to artificial intelligence; However, Australian borrowers are rated resilient.

The tone of the meeting minutes in general indicates that the possibility of further increase in the interest rate remains open. In the analysis accompanying the report, it is stated that the markets have factored in another increase of about 15 basis points by the end of the year and 30 basis points in the first half of 2027. Also, any further escalation of the Iran conflict can increase the risk of inflationary pressure and further tightening of the central bank by raising oil prices.

Parts of the market that are sensitive to interest rates, including banks, real estate and consumer discretionary, are still described as vulnerable; This assessment in the text is accompanied by the drop in housing prices and the board's expectation for the continuation of the relative weakness of households' spending.