Inflation beast still a real and present danger, Reserve Bank minutes warn

The Reserve Bank has signalled that inflation remains a clear and present danger to the economy and that another interest rate rise can’t be ruled out.

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That’s despite evidence that twelve interest rate rises since May last year are continuing to slow the economy with Board members warning inflation is still too high.

While the RBA board left the cash rate in hold at its meeting a fortnight ago, the minutes released this morning show the battle to get 4.9 percent inflation back into the 2 to 3 percent target zone is far from over.

In considering whether the inflict another rate hike, the Board noted that inflation was “still too high” and “was expected to remain so for an extended period”.

While headline inflation is slowing, the minutes show concern that services inflation might take a while to decline and that the labour market remains tight with the jobless rate hovering around a 50 year low.

“Were inflation to remain above target for an even longer period, this could cause inflation expectations to move higher which would likely require an even larger increase,” the minutes warn.

However, members also note that the economy is “experiencing a period of subdued growth” led by household consumption as high inflation and rate rises weigh on household budgets.

As the impact of rate rises hit, the Board noted the risk “the economy could slow more sharply than forecast” - in other words a hard economic landing.

The minutes show a deepening concern about China where conditions in the property market had deteriorated further.

“Members noted .. significant challenges from financial stress among developers and further defaults posed a risk to economic activity.”

Board members said they would be guided by incoming economic data in assessing the need for further hikes.

Money markets only see an 8 percent probability of a cash rate rise to 4.35 percent at the RBA’s October meeting.

However, if inflation makes a comeback or remains sticky, there's an outside chance of another rate rise before the end of the year.

Judo Bank economic adviser Warren Hogan sees the outside chance of a November rate rise on Melbourne Cup Day as the final nail in the coffin of inflation.

The minutes make no mention of Philip Lowe’s final meeting as Reserve Bank governor.

Michele Bullock is in her second day as RBA governor and will chair the next meeting on October 3.