Economy Currently As Expected, Risks In Both Directions

The minutes from the RBA’s September meeting showed that the decision was again between unchanged rates and another 25bp hike. But the data had been “consistent with inflation returning to target within a reasonable timeframe” with the OCR at 4.1% and some more time to assess the impact of tightening to date was valuable given the lags involved. They discussed both upside and downside risks to the outlook for prices but for now developments that shift inflation and growth off the expected path would be required for the RBA to change rates in either direction.

• A number of risks that inflation doesn’t return to target as expected were mentioned and the impact these would have on inflation expectations. This would “require an even larger increase in interest rates”. The RBA noted that petrol prices rose recently and thus Q3 headline inflation could increase, thus the return to target “could be uneven”. With Brent crude up almost 9% in September, thus fuel prices remain a risk to inflation.
• Productivity fell 2% q/q and -3.5% y/y in Q2 and the RBA is concerned that if it doesn’t improve then inflation could stay higher for longer. The other risks include more “persistent” services inflation and also rising house prices.
• The risks of a downside surprise to growth driven by the consumer were discussed, as well risks from China’s economic outlook. But “recent developments had not materially altered the outlook” and the economy “appears to be on the narrow path”.
• The labour market remains tight but is easing and wages are “broadly consistent” with the RBA’s forecasts.
• See minutes here.