Board Believes Target Can Be Achieved At Current Rate, Services Remain Risk

The minutes from the August RBA meeting showed that at this stage the Board believes that it can return inflation to the target band by mid-2025 with “the cash rate staying at its present level”. It assumed rates peak at 4.5% in its forecasts before easing to 3.25% by end-2025. The August minutes and today’s steady wage inflation point to another hold at the September and October meetings. The November meeting is a risk depending on the outcome of the Q3 CPI data on October 25 and revised forecasts.

• The RBA continues to keep its options open by saying that “further tightening” may be needed. Any future moves will be data dependent and require a deviation from expectations.
• Both pausing and a 25bp hike were discussed in August with the arguments for holding stronger. The Board saw recent inflation developments as “encouraging” and expected slower growth should see it “moderate” further. It also reiterated that there had been significant tightening to date that is yet to be fully felt and there are signs that it is “working”, such as the significant slowdown in consumption. “Early signs” the labour market was turning was also cited.
• On the more hawkish side, services inflation is as an upside risk to prices and it remains a focus. Another risk is that productivity growth doesn’t improve as the RBA is expecting and that wages respond more to the tight labour market. The recovery in house prices was also mentioned as a possible indication that financial conditions are easier than thought.