Invest2 publishers2 min readPublished
RBA hikes for the fourth time this year to 4.60% despite a housing downturn
Australia's Reserve Bank raised its cash rate a quarter point to 4.60% on Sept. 29, its highest level in 15 years. It is tightening into a housing downturn because it believes higher fuel costs are now passing into the prices of other goods and services.
The Investor · Invest desk
What happened
- The board voted unanimously for the move, which brings this year's tightening to a full percentage point.
- The RBA said in its statement: "Inflation has become more of a problem since the last meeting."
- Reuters expects August consumer prices, due Sept. 30, to be 4.1% higher than a year earlier, with core inflation at 3.6%, against a 2% to 3% target.
- Unemployment rose to 4.6% last month as the cost of successive rate increases built up.
- Investors had bet heavily on this increase, and markets are priced for at least one more hike.
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Why it matters
- decision The policy rate sits only about half a point above expected headline inflation, so the board has little room to call policy tight. A hold would first need a softer CPI print.
- cost Mortgage holders and job seekers pay for the RBA's response to fuel costs. The rate is a full point above where it started the year, and it is landing on a housing market that has already turned down.
- exposure The RBA now treats fuel pass-through as grounds to tighten. That means any further rise in energy prices carries rate risk for Australian borrowers.
Four quarter-point moves this year mean the cash rate started the year at 3.60% [1]. Even after all four, it sits only about half a point above the 4.1% headline inflation Reuters expects for August [6][2]. Against core inflation of 3.6%, the gap is one point [3]. Core is 0.6 point above the top of the target range, and the headline forecast is 1.1 points above it [4][5].
Energy is the part of the problem a rate hike cannot fix directly. The board said upside risks to inflation were materialising, with energy costs high and productivity weak at home [10]. Seoul Economic Daily's report described an energy-driven shock adding to strains on Australia's supply capacity [14]. A central bank cannot lower the price of fuel. It can try to stop the pass-through, which the RBA called partial, from spreading to all prices [9]. With productivity weak, the only lever it has is demand.
Choosing demand has a cost, and the board accepted it. With housing already in a downturn [11] and unemployment at 4.6% [12], the bank could have held and let a softer labour market bring prices down over time. It did not wait.
Investors now price at least one more hike [13]. Three developments would change that. If the August print comes in below 4.1%, or core eases from 3.6%, the board has room to hold [6][8]. Further rises in unemployment from 4.6% would add weight to the jobs side of the decision [12]. Cheaper fuel would limit how far the pass-through spreads [9].
I think another hike is the more likely next move, and the bank's own numbers support that. A policy rate half a point above headline inflation is thin when that inflation runs 1.1 points over the top of the target [2][5]. The counter-case is in the RBA's wording. It said it would "continue to take the steps needed to return inflation to target" [5], and it made further increases conditional on being necessary [15]. A full point already delivered into a housing downturn may prove to be enough once it feeds through. This view is wrong if core inflation falls below 3.6% over the next few prints and the board holds at its next meeting.
What to watch
- The Sept. 30 August CPI release, measured against Reuters' forecasts of 4.1% headline and 3.6% core inflation.
- The next monthly unemployment figure, and whether it rises further from 4.6%.
- Whether the RBA's next statement still makes further hikes conditional on necessity, or changes that wording.