Australia’s Inflation Test

The decision in context

As of 12 September, the question was whether persistent inflation would push the Reserve Bank of Australia to lift its cash rate from 4.35%. A rate decision is a response to a changing economy; it is not, by itself, an investment thesis.

The RBA’s earlier statements emphasised that the path for inflation and the labour market remained uncertain. That matters in a country where variable-rate mortgages transmit policy changes to households relatively quickly.

Source: Reserve Bank of Australia. This decision occurred after the newsletter was sent.

29 September update

Subsequent event: On 29 September, the RBA raised the cash-rate target by 25 basis points to 4.60%. The earlier case for a possible hike is now historical context, not a pending forecast.

The move confirmed that the Board judged inflation risks serious enough to tighten further. It did not settle how long rates would stay there, or whether the economy would slow more than expected. Those are separate questions for the next data releases.

How the hike travels

The temptation is to label the hike “good” or “bad” for the ASX. Its effects are less uniform. Exporters, importers, lenders and domestically focused businesses have different sensitivities to the Australian dollar, financing costs and consumer spending.

What to watch next

Core inflation, wage growth, retail volumes and mortgage arrears will show whether the tightening is cooling demand without breaking it. We would also watch the RBA’s language on the balance between inflation and employment. A weaker currency could complicate the inflation fight; a sharp slowdown in spending would change the risk in the other direction.