RBA holds cash rate at 3.60% as inflation remains the big issue

There was no way the RBA could consider a cut to interest rates at this Board Meeting given recent stronger activity data and higher than target inflation prints.

The decision to hold was unanimous thought the commentary in the decision definitely evolved to signal the risk that monetary policy may have to tighten earlier than previously expected. This message is likely to be reinforced in the Governor’s press conference.

Three key parts of the press release signal this increased hawkishness:

• The data does suggest some signs of a more broadly based pick-up in inflation, part of which may be persistent and will bear close monitoring.
• On the domestic side, the pick-up in momentum has been stronger than anticipated, particularly in the private sector. If this continues, it is likely to add to capacity pressures.
• The recent data suggest the risks to inflation have tilted to the upside, but it will take a little longer to assess the persistence of inflationary pressures. Private demand is recovering. Labour market conditions still appear a little tight but further modest easing is expected. 

I dispute whether inflation has picked up – I think it’s too early for that to have occurred cyclically. Rather, inflation never fell as much as the trimmed mean temporarily suggested earlier this year.

Nevertheless, if inflation bottoms above the 2.5% target and the economy continues to strengthen, the implications are quite clear: the Board will have no option but to move to a more restrictive setting of monetary policy. The first test of that resolve would likely be a q/q trimmed mean for Q4 of 0.9% or above.

While that’s not especially welcome news for either mortgage holders or businesses, it’s important that inflation is not allowed to continue to rise at above a 3% rate given the sharp increase in the cost of living in recent years.