Odds of Melbourne Cup Day rate rise shorten

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Home buyers and businesses could be saddled with a Melbourne Cup Day interest rate rise after the Reserve Bank revealed it was concerned about rising property prices while declaring it had a low tolerance for inflation remaining too high for too long.

Unemployment and inflation figures due within the next week will sway the RBA board’s decision in November, after the central bank admitted the jobs market had turned, suggesting unemployment was likely to rise.

Minutes of the Reserve Bank’s most recent meeting suggest it could lift rates next month.Credit: Kate Geraghty

Minutes of the bank’s October meeting, at which it held the cash rate steady at 4.1 per cent for the fourth month in a row, revealed the board debated whether to lift rates further.

The minutes included a new statement about the bank’s preparedness to tackle inflation if it remained elevated, in a clear sign next month’s meeting could result in another rate hike.

“The board has a low tolerance for a slower return of inflation to target than currently expected,” it said for the first time.

“Whether or not a further increase in interest rates is required would, therefore, depend on the incoming data and how these alter the economic outlook and the evolving assessment of risks.”

Treasurer Jim Chalmers said the government understood households were facing pressure from higher interest rates and high but moderating inflation.

“While inflation is moderating, it is more persistent overseas and it is expected to also be a bit more persistent here,” he said.

The minutes revealed board members were increasingly concerned about the lift in house prices, which have increased by 6.6 per cent nationally since January, and how this could encourage cash-strapped consumers to continue spending.

“The rise in housing prices could also be a signal that the current policy stance was not as restrictive as had been assumed, although there was other evidence that monetary conditions were tight,” the minutes said.

“[Board members] noted that while rising housing prices alone would not warrant tighter policy, the associated rise in household wealth could support consumption by more than currently assumed, especially if housing turnover were to pick up more quickly than expected.”

But in favour of holding rates steady, the minutes showed members worried that the full impact of past increases had yet to work through the economy.

The minutes noted that inflation had eased to 6 per cent from its 7.8 per cent December peak, and spending growth was weak as people’s real disposable incomes continued to fall.

The slowdown in the jobs market, including a lift in the jobless and underemployment rates, might also be a signal that past rate rises were starting to bite.

A quarter of a percentage point rate increase, if passed on in full by commercial banks, would add about $100 a month to repayments on a $600,000 mortgage.

Westpac chief economist and former RBA assistant governor Luci Ellis said while it was still unlikely the central bank would lift interest rates, it was now a possibility.

“A significant upside surprise in the September [inflation] release, along with further evidence that the real economy is proving more resilient than expected, might be enough to change their view and thus their decision,” she said.

ANZ’s head of Australian economics, Adam Boyton, said a rate rise in November would require the inflation figures to be “uncomfortably high”.

Job figures out on Thursday are expected to show a slight lift in unemployment, but inflation data is forecast to show ongoing price pressures.

A further lift in official interest rates would further slow an economy already struggling to grow.

Deloitte Access Economics on Wednesday said it expected a per capita recession and a retail sector recession to rock the economy over the coming 12 months.

It believes economic growth, currently at 2.1 per cent, will slow to just 1 per cent by the March quarter next year before picking up, driven in part by wages exceeding inflation for the first time in three years.

Through 2024-25, Deloitte is expecting the economy to expand by 1.9 per cent and wages to grow 0.4 percentage points more than inflation.

Deloitte partner David Rumbens said the Reserve Bank should continue to hold interest rates steady as inflation would continue to edge down.

“The business cycle will soon be past its low point and start turning up again. Real wages will start rising in late 2023, and strong population growth provides foundational support,” he said.

“Beyond the short-term economic cycle, there are also significant opportunities for Australia’s businesses, through the adoption of AI, and from the necessary transformation to net zero emissions by 2050.”

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